Japanese tyre makers avoid share price carnage
Despite the fact that their homeland suffered the combined catastrophe of earthquake and tsunami earlier this year Japanese tyre makers faired surprisingly well at the stock exchange in August at a time when the share prices of virtually all the other tyre majors took a beating. (See “Bloodbath at the stock exchange”).
While some firms (take Cooper and Goodyear that fell by 40 per cent and 33 per cent respectively) suffered heavy losses, Bridgestone, Yokohama and Sumitomo fell 7, 5 and 4 per cent each. But why? Perhaps it is because, strangely enough, these circumstances combined with very long term ethos of Japanese businesses is deemed more predictable that the US and European markets that plagued by instability caused by the debt ceiling and eurozone crises respectively.
Let’s take a look at Sumitomo’s case. When it came to Sumitomo Rubber’s first quarter 2011 results, financial analysts were unsurprised. The firm’s estimate for first half operating profit is said to be in line with the upward revision made on 29 July.
Operating profit rose from 9.7 billion yen in the first quarter to 10.1 billion yen in the second quarter of the year. In the second quarter the high cost of raw materials reportedly had a negative effect of around 14.8 billion yen and declining profit at the sports business is said have had a negative effect of 1.7 billion. However price hikes boosted profit 10.2 billion yen and contributions from higher sales volumes and the product mix things 5.2 billion yen better.
Like many other firms second quarter sales of replacement tyres on the North American market were said to have been “sluggish” (down about 10 per cent year-on-year), as in the first quarter, but domestic sales of replacement tyres were strong and sales in Europe and Asia expanded.
However, despite being party to the same external pressures as its competitors, and despite the fact that many of them produced strong results, the Japanese firm didn’t lose as much in terms of its share price. In fact the firm raised its estimate for full-term operating profit by 14 billion yen.
While the impact of the high cost of raw materials worsened 2.3 billion (natural rubber improved 8 billion yen, petroleum-related materials worsened 11 billion), the positive effect of tyre price increases improved 8 billion and the positive effect of volume and product mix was up 3.8 billion. The firm forecasts that the effect of sales volume and product mix (year-on-year) will decrease significantly from +13.4 billion yen in the first half to +1.9 billion yen in the second half.
However, according to Morgan Stanley, even these numbers may be a case of the company playing it safe: “…considering the backlash to favourable sales of snow tyres in the second half of last year and a weakening in the product mix due to more production of new car tyres, we have the impression that this forecast is cautious. We think that the increase in overseas shipments of replacement tyres and the steady passing through of tyre price hikes will lead to higher expectations for…earnings, as in the case of Bridgestone.”
That said, the upward revision of Sumitomo Rubber’s second half 2011 profitability came as a pleasant surprise to analysts. The upward revision to the full-term forecast (operating profit was raised from 29 billion yen to 43 billion yen), for example, exceeded the market consensus. Furthermore market watchers at Morgan Stanley said they interpreted this as a sign that there would be more good news at the end of the next period: “Revisions to tyre prices designed to offset the high cost of raw materials are progressing, and overseas sales of replacement tyres are expanding. Thus, earnings are likely to continue to improve, and we believe that expectations for next term’s earnings will rise.”
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