In July the European passenger car tyre market fell 7 per cent, with truck tyres falling 3 per cent, according to Michelin sourced figures. In contrast, the ailing North American market appears to be beginning to recover, according to Deutsche Bank estimates. Here the market was flat in July with truck tyre sales actually growing 3 per cent. Business in the emerging markets is reportedly strong with both Brazil and China both growing at 20 per cent plus rates.
Michelin were upgraded on 3 September to a rating of “outperform” by a Credit Suisse report. Margin stability and a sharp fall in oil prices have led analysts to the conclusion that the French manufacturer will continue its upward trajectory on the markets despite “volume and raw materials headwinds”. The brokerage believes that Michelin is “on track to deliver an 8.2 per cent margin in 2008 thanks to solid price and cost discipline.”
With this in mind, the report also raised the target price on Michelin shares from 40 euros to 58 euros, adding the caveat that “to justify value beyond this level we believe management needs to better explain restructuring cost savings.” Credit Suisse maintains its scepticism on the subject of Michelin’s long-term margin and growth targets.
A Deutsche Bank analyst report indicates that Goodyear’s decision to close 92 “underperforming” retail locations in the US is a good thing. “Overall, we view this announcement positively,” says the report, “as it demonstrates additional cost savings as GT (Goodyear).” The closure of the retail stores is expected to result in after-tax charges of US$40 million and generate savings of $9 million per annum. This level of savings, says Deutsche Bank, could potentially add $0.03 to $0.04 to its earning estimate.
Sumitomo, Yokohama, Toyo and Bridgestone have excelled on the Tokyo Stock Exchange today, leading general gains in other sectors. The results are based on the decreasing price of oil, down 24 per cent from its record 147.27 US dollars a barrel on July 11. Also contributing to the gains was an analyst report from Nikko Citigroup upgrading Sumitomo to “buy” and Bridgestone to “neutral” from “sell”.
Sumitomo – Japan’s third-largest manufacturer of tyres – had a particularly good day, rising by the widest margin in three weeks to 927 yen (5.9 per cent, 52 yen). Analysts are predicting further gains for the Kobe firm, as it looks to boost earnings with increased sales in Russia. Toyo rose 2.6 per cent to 277 yen, Bridgestone 1.7 per cent to 1,848 yen and Yokohama 0.4 per cent to 563 yen.
The price of natural rubber is finally starting to level off, after increasing 40 per cent in the last year. According to Deutsche Bank analysts, the price is now likely to level off at around US$2.8/kg, having risen to US$3.3/kg (RSS3 grade) by June 2008. “If natural rubber price follows recent drop of oil price, it could drop to US$2.6/kg (the average of the last 18
months),” the analysts observed. The news is likely to be greeted by a sigh of relief by tyre manufacturers who had been witnessing erosion in their operating profits due to increased raw material prices.
According to market analysts Plimsoll Publishing, the company’s Tyre Manufacturers & Distributors report published in June, “prompted a backlash in the…industry.” In response to this, Plimsoll has produced an updated study to incorporate the very latest figures and bring the picture right up to date.
The feedback Plimsoll received from the original publication was that in general, companies were not experiencing too much difficulty in retaining sales. This is borne out in the updated analysis that puts current market growth at a respectable 5 per cent. Note however this is down from the previous year’s 7 per cent. 156 of the 200 companies analysed are said to be holding or increasing sales on last year.
GfK data exclusively seen by Tyres & Accessories shows that sales of exclusive brands account for 10.4 per cent of the 2007 UK car tyre replacement market. Based on the results of GfK’s ongoing research, this means 2.62 million of these tyres were sold in the market last year. GfK defines exclusive brands from the retail perspective, meaning tyres that are only available from one clear retail network such as Kwik-Fit’s Arrowspeed brand or ATS’s Riken.
A financial analyst report on the fortunes of Cooper Tire suggests that investors will continue to be cautious with the American tyre manufacturer despite some positive signs.
The Deutsche Bank study states that Cooper’s “‘clean’ EPS loss, adjusted for a ‘normal’ 30 per cent tax rate, would have been ($0.26), compared with our ($0.23) estimate.” This figure is one that the Bank believes will deter investors for the time being, alongside “continued market share declines, high cash burn, lack of identifiable cost reductions, and warnings of further raw material increases.” On the other hand, the analysis states that the company’s plan “to raise prices by ‘up to 10 per cent’ in October” will mean that the share price will retain its strength.
In July those at Continental AG learnt what it feels like to be victims of their own success. Only a year after it multiplied group annual sales to over 25 billion euros through the acquisition of Siemens VDO, it appears Continental has made itself so attractive to bearing maker Schaeffler Group that the privately held company (which is about a third of Conti’s size) stalked its way to controlling roughly 36 per cent of the tyre and automotive supplier (see August's Tyres & Accessories for full coverage). On the one hand this is a compliment to the leadership that has brought Continental to where it is today. But on the other hand it comes as stark warning that stock markets can be fickle and public ownership can leave you at the mercy of shareholders.
Furthermore, it could be argued that leveraging itself and courting the stockmarkets in order to achieve its ambitious goals has been a double-edged sword – and in July Conti’s management felt the sting of its own blade. In the last few years Continental has been on something of corporate shopping trip. The biggest single purchase by some way was the acquisition of Siemens, announced in July 2007. This move was perhaps the biggest step towards Conti’s vision of a “new Continental,” which would produce cutting edge tyre to brake automotive technology.
Michelin & Cie shares fell 4.8 per cent on July 28 following a published report that the tyremaker’s first-half earnings have failed to meet management targets. Shares fell 2.31 euros to 45.49 euros, furthering the stock’s decline this year to 42 per cent and valuing the company at 6.6 billion euros.
According to a French financial newsletter, Michelin will announce cost-cutting measures at its July 30 earnings presentation, and jobs cuts will also possibly be tabled. Profits have been whittled away by weakening demand for cars in mature markets, which has made it harder to pass on raw material price increases to customers, Some analysts, including London based Adam Jonas from Morgan Stanley, have cautioned that Michelin may find it difficult to implement recently announced price increases.
Financial Times Deutschland is reporting that an unidentified Continental AG supervisory board member said a takeover offer of between 90 and 100 euros per share would be more appropriate, than Schaeffler Group’s current 70.12 euros bid. The report also suggested that a foreign investor could be about to launch a counter-bid for Continental, making Schaeffler’s all German takeover bid appear more acceptable.
However market analysts are casting doubt over this theory: “I wouldn’t know of any industrial company that could make a counter-bid,” said Stephan Thomas, a fund manager at Frankfurt Trust Investment GmbH in Frankfurt. “Given the current credit- market turmoil, it’s unlikely that private equity companies will do so,” he told Bloomberg.
Financial analysts at Morgan Stanley have downgraded Michelin stock to “underweight” and predicted Michelin will make a profit warning when it announces its first half 2008 results on 30 July. “We are double-downgrading Michelin…This year’s sharp rise in raw material costs may be the immediate source of pressure on earnings, but we think the bigger risk going forward is slowing OE and replacement demand,” the analysts explained. Describing the premium tyre manufacturers’ pricing discipline as “remarkable,” the bank predicted pre-tax (EBIT) profit margins would still fall to 7.3 per cent, near the company’s historical average, in 2008.
Explaining the reason for their rating downgrade, the Morgan Stanley analysts suggested Michelin’s truck and speciality tyre segment strengths could be weakness in a tough market for vehicle makers: “With 50 per cent of [Michelin’s] revenues coming from truck and speciality tyres, Michelin’s fortunes are tied to the industrial cycle more than any other tyre company we cover globally.” In addition, according to the report, around 30 per cent of revenue and 20 per cent of Michelin’s profits are said to be generated in North America where recent tyre demand has been particularly weak.
Rocketing fuel prices, emissions-based car tax and climate change are taking their toll on drivers who are turning their backs on gas guzzlers and choosing smaller cars as well as public transport, according to research by insurance retailer Swinton. Swinton has analysed its motor insurance quotations database over the last 12 months and reports a dramatic increase in the numbers of motor quotations for smaller-engined cars.
Motor insurance quotations for the very largest cars on the roads including Hummers and Range Rovers have fallen by 16 per cent compared to 06/07 quotes, with Swinton also seeing a decrease in drivers seeking insurance quotes on more everyday Sports Utility Vehicles (SUVs), down 11 per cent in the last year. Quotes for cars with engines below 1.5 litres (diesel and petrol) have risen by an astonishing 20 per cent, a statistic that Swinton’s analysts lay squarely at the door of higher fuel prices, car tax bands and driver concerns over climate change.
Schaeffler Group is likely to wait until 2010 before it takes full control of Continental AG, German radio station NDR1 reported on 16 July. The report, which didn’t cite any sources, suggests that Schaeffler will wait until the lion’s share of the loan arrangement Conti racked up to finance the Siemens VDO acquisition expires. According to the report, this would also mean Schaeffler would have to re-negotiate conditions before the loans expire, and in the current conditions would not get such a good deal.
The German radio report was aired the same day that financial analysts at MorganStanley published an investor note suggesting “a takeover bid meant to fail could push the share price higher for the next 30 days.” The MorganStanley analysts point out that, in their opinion, a full takeover of Conti does not appear “financially feasible.” However, the takeover bid should clearly add strong support to the share price in the short term, the analysts conclude.
Continental AG has confirmed it has had “one brief conversation” about a possible engagement by Schaeffler-Group. Now the tyre and automotive supplier is said to be waiting for Schaeffler to substantiate its plans, before the management board of Continental evaluates these. The initial talks took place on Friday (11 July) afternoon. According to Continental AG, no further conversations took place.
The official statement appears to confirm a Financial Times (FT) report that Schaeffler had approached Continental about a takeover which could value Europe’s second biggest tyre company at more than 10 billion euros (5.8 billion). FT reports that Schaeffler generates 9 billion euros in revenues compared with Conti’s 26 billion euros.
Herzogenaurach, Germany-based Schaeffler is apparently aiming to take Continental private. One report, in the German daily Frankfurter Allgemeine Zeitung, said the company would consider spinning off the tyre business to help finance the transaction. However, a Continental spokesperson was swift to respond by saying the Hannover-based company would fight any hostile takeover: “In principle, our stand is that we have no reservations against investors who support our long-term strategy and our business policy and above all do not intend to break up Continental…Those who might want to launch a hostile takeover would need all the luck available because we will fight against it.”
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