Despite the difficult environment which is not likely to lead to improvements in the coming half year Deutsche Bank is recommending Michelin shares as a “Buy”. The analysts believe that the focus on high performance tyres will pay off and they believe also that, due to the anticipated sale of the Pirelli truck division, competition will be lower in the future for Michelin, which is very strong in that market.
The prospects for manufacturers of heavy trucks in the USA are rather gloomy for this year, as experts are expecting a decline of up to 30 per cent. Despite this, analysts are not pessimistic about the prospects for Michelin, as the turnover from OE sales of truck tyres is only about 3 per cent of total group turnover. Better results than for 1999 are expected too for Goodyear, due to the downward trend in raw material prices and, last but not least, the recently-announced tyre price increases look like they will stick.
The French group has achieved a rise of 4.5 per cent in the first half of 2001, compared to the same period last year, and now has a turnover of 7710 million Euro, but the EBIT has fallen 9 per cent to 491 million Euro. Analysts had been expecting a slightly better result. As a prominent supplier of truck tyres, Michelin is suffering under the very bad market conditions prevailing in the US. Not only did the OE market fall, but – and this was unexpected – so did the replacement market, and the company cannot foresee any improvements in the US market for the second half of the year. Michelin as a group did not sell as many tyres as expected, as a result of the Fiestone recall, but the trend towards premium brands (the so-called “flight to quality”) still exists. The Michelin brand has sold a lot more tyres than in previous years, which gives the group much better margins. The return on sales for the whole year should be between 6.2 and 6.8 per cent – some months ago, 7.7 to 8.3 per cent was expected. Perhaps there might be some more good news for Michelin if Firestone and General were forced to recall more tyres.
The US recall of Firestone tyres has claimed its latest victim, as Yoichiro Kaizaki, president and CEO of the Bridgestone corporation in Japan, is to resign. The resignation is regarded by many as an admission of poor handling of the public relations side of the recall. From the beginning, Bridgestone/Firestone has been criticised for its mis-handling of the situation and the president of the American company, Masatoshi Ono, was replaced by John Lampe. The recall problem began last August, but it was not until one month later that Mr. Kaizaki first commented on the situation, promising total support for the Firestone brand and trying to link the Ford Explorer with accidents, denying that the problem was solely down to the tyres. Mr. Kaizaki’s replacement will be Shigeo Watanabe (58) who is a senior managing director at Bridgestone, and who has a strong engineering background. His appointment is expected to be ratified at a shareholders’ meeting on March 29th. Mr. Kaizaki will continue to remain at Bridgestone as a full-time adviser to the board of directors.
First came the second tyre recall with costs up to 3 bn $-US, secondly the “extended guarantee” due to problems with ignition systems, and thirdly many quality-related recalls of new car models, all of which have cost Ford a lot of its expected profit. Therefore the management has announced early retirement for up to 5000 white collar workers in the US. This is seen as the first step in a major restructuring in North America, where Ford has announced about 13 p.c. fewer new registrations compared with the same time last year, whereas the market in general shows only about 5p.c. fewer registrations of new cars. Analysts from Wall Street have already greeted Ford’s latest decision positively.
Almost all car manufacturers are offering new SUV models. While sales figures for December last year fell dramatically for the “big three”, the European, Japanese and Korean producers were very successful. Analysts are worried because they expect a price war in the till-now-profitable SUV segment, caused by growing over-capacity. Products from Chrysler especially, but also from GM to some extent, are under growing pressure. So far, the big three have cut back production in order to avoid a costly incentive programme. During press conferences in Detroit, high ranking managers were unable to dispel these concerns and thus analysts do not recommend GM and DaimlerChrysler shares as a buy; in fact, quite the contrary.
Ford has agreed to settle lawsuits alleging that faulty ignition switches cause vehicles to stall without warning while in use. The problem is said to affect millions of vehicles manufactured between 1983 and 1995. Press and analyst figures vary from 5 to 22 million vehicles. Some months ago, a Californian judge ordered a recall of up to 1.7 million vehicles in the state because of the problem. Ford denies any defect but has already settled a number of cases and the latest offer of settlement will mean replacing ignition switches on vehicles which have travelled less than 160,000 kilometres. The proposal will be reviewed by the judge and, if approved, analysts estimate that the cost to Ford could be up to $1 bn; a figure which Ford says is “substantially overstated.” Among the models affected are the Escort, Explorer and Taurus.
Despite the admission of chairman and CEO Samir G. Gibara that Goodyear’s 4Q results were “disappointing”, some financial analysts have recommended the company’s shares as a “buy”. The results were better than forecast, plus the analysts are confident that Goodyear will start to turn things around before long.
Goodyear’s net income for the fourth quarter of last year amounted to US$ 47.8 million compared with US$ 121.5 million in the fourth quarter of 1998. The company’s net income for the whole of 1999 was US$ 241.1 million compared to US$ 682.3 million in 1998.
Analysts are recommending investment in GM rather than Ford. Ford is under the public microscope and the focus of analysts. This week, the shares have fallen 13%, representing damage to the group of more than US$ 10 bn. The management is accused of having known about the problems – which have led to the voluntary recall of Firestone tyres – for around two years. Consumer groups and official authorities want an answer to the question whether Ford has worked (ie changed or improved) on the suspension of its vehicles in Venezuela in order to overcome the problems there. The reaction at the stock exchange has probably gone far too far, as, even if the company had to mount a vehicle recall, the figure of US$ 10 bn is too high. The real costs, if any, would be in the region of US$ 1 bn or less.
Financial analysts are predicting that Michelin’s net profits for 1999 will be between 350 million and 661 million Euros. The reason for the unusually large spread is that no-one knows exactly what provisions will be made in the accounts to cover charges for restructuring.
Despite the recovery in vehicle sales in Asia over the past two years, analysts are predicting a slowdown in sales in parts of the region, notably South Korea. The Asian car market is expected to fall by 3% next year, with little sign of recovery in 2002.
Following a few months of indifferent performance, stock market analysts are meanwhile promoting tyre manufacturers’ shares as a good buy. The reasons for this optimism are that the rise in prices of raw materials (rubber, oil, carbon black) appears to have stopped, or at least slowed down, and that price increases announced in the USA are holding.
DaimlerChrysler have said that they regard the nine billion Dollar law suit by its third largest shareholder, the Tracinda Investment Group, as completely unfounded. The lawsuit alleges that DaimlerChrysler have deliberately deceived the US Stock Exchange Control Institution as well as the shareholders. Analysts predict that this law suit has little chance of success. Although Deutsche Bank, the main shareholder of DaimlerChrysler, have demonstratively supported the management, the car manufacturer’s share price went down significantly to 45.85 Euros.
Evolution for sure, revolution not at all. That’s Michelin’s opinion regarding the B2B E-Commerce initiative of leading global tyre producers which was announced recently.
If you would like the latest news from the Chinese tyre industry in Chinese, visit our partner site TyrepressChina.com. Or click below to continue on Tyrepress.
