Wholesale destocking leads to 10% fall in US tyre shipments
The latest data from the US shows that shipments, what we might call sell-in sales, of light vehicle replacement tyres fell 12 per cent for RMA members and 10 per cent for the overall industry in July. This follows falls of 8.6 per cent in June and 10.7 per cent in May. Commenting on the figures, Deutsche Bank analysts pointed out that “the weakness was significantly more pronounced for broadline (economy) tyres,” with volumes down more than 20 per cent year-on-year in this segment.
The analysts explained that, in their view, the sizes of the swing can only be explained by large scale distributors running down their product reserves: “In our opinion, the sheer magnitude of the declines indicates an inventory destocking in the wholesale channel.” Nevertheless they remain upbeat about the prospects of recovery: “We continue to expect that demand should recover in the medium-term (we estimate that full-year 2011 volumes are approximately 9 per cent below trend volume levels), and that investors should not view current earnings levels for tyre companies as representative of trend profitability.”
However, the implication is that those companies that are more exposed to the economy sector will be more adversely affected by the de-stocking effect. “Given Cooper Tire’s higher exposure to the weak broadline segment, we believe that a more conservative view on Cooper’s second half shipment volume is warranted. We now expect second half North American shipments to decline by approx 4 per cent year-on-year.” This is a marked increase in the amount steepness of decline estimated by Deutsche Bank, who had previously project a 1 per cent decline. As a result the analysts reduced their 2011 and 2012 earnings per share estimates to $1.05 and
$1.80 from $1.45 and $1.95.
Goodyear, the US’s largest tyre firm is expected to fair better than Cooper according to Deutsche Bank investors note, which was published on 25 August. According to the bankers, high-end tyre demand “continues to be more resilient
than the overall industry” which should favour Goodyear over Cooper. As will the strong European winter tyre market that is widely expected and which could help mitigate the North American market’s weaknesses.
Look forward Deutsche Bank now estimates volume growth of 3 per cent for Goodyear and 4.5 per cent for Cooper in 2012. “Given the impact of one-time inventory destocking in 2011, these estimates would imply only a modest recovery in 2012 consumer demand,” the analysts concluded.