European output up, but Michelin exposed in NA, not enough in emerging markets
Following Michelin’s investor’s day briefing at its Cuneo, Italy factory on 5 October financial analysts suggested that while the good news is that Michelin’s European production is up and increasingly efficient, the company remains over-exposed amidst the ailing demand of the North American markets and conversely not exposed enough in the emerging markets.
Although offering insights into Michelin’s long-term ambitions, analysts from Morgan Stanley were relatively muted in their response to the French tyre giant’s latest investors day in Cuneo, Italy. Their response, published in an investor note entitled “investor day good, but not a booster” was that the details presented confirmed the view that Michelin is “the auto stock most geared to weakening North American tyre markets, [is] underexposed to emerging market growth and sensitive to execution risks on a profound expansion plan.
However there was good news too and the analysts supported Michelin’s confidence that it will attain its goals in full-year 2011 results: “Michelin is confident in delivering a higher 2011 EBIT year-on-year. With the first nine months in the bag, a miss seems unlikely…” Nevertheless even this was seasoned with a bit of pessimism: “…although we do see downside risk on the 1.9 billion euros 2011 EBIT in consensus due to deteriorating NAFTA markets.”
Countering perceived underexposure
This, however, avoids the counter thesis that the underexposure argument is old news. Michelin’s sales may have grown at 1 per cent compound annual growth rate in the first decade of 2000, which Morgan Stanley interprets as reflecting underexposure to emerging markets and a net capacity decrease due to restructuring in 2005 – 2010, but it doesn’t take account of the “tremendous effort” Michelin is currently making with three greenfield projects in India, Brazil and China.
On this note Morgan Stanley agrees that this is “the right move”, but also points out that Michelin may “prioritize investments for long-term goals over short-term budgets” and that this may disappoint consensus. But this isn’t a crime and is more likely an example of Michelin’s stakeholder based rather than stockholder only approach in action?
Specifically referring to Michelin’s operations in China, the analysts at Morgan Stanley asked if Michelin were “late to the game” in China and if this raises questions about profits: “We do not doubt Chinese growth will outpace all other regions through 2015, but we remain sceptical on profitability.” According to the investor’s note, Michelin’s Chinese margins are currently below peers something which the analysts concede is “understandable given new plant ramp up.” The problem is they are “not convinced it will become very margin accretive later given new capacity from global and Chinese competitors, the latter often supported by governments.”
40 per cent production gain in Europe
Analysts from Deutsche Bank’s were also present at the Cuneo meeting and report they took three main points away with them: They referred to the 40 per cent gain Michelin achieved in its European passenger car tyre factories over the last four years, a feat accomplished by increasing production 10 per cent while cutting the workforce by 30 per cent, as “impressive”. But these analysts also noted that “significant expansion projects” in emerging markets are necessary if Michelin is to maintain global market share.
They too opined that the tyre maker’s 70 per cent mature market presence is too large and its 30 per cent emerging market share too small. Growth in mature markets, they said, is only occurring at two per cent per annum, compared with eight per cent annual growth in emerging markets. The third point of interest to the Deutsche Bank analysts was that the current environment for passenger car tyres is said to be “good” due to restocking taking place for winter tyres, “strong” for earthmovers due to a shortage of branded tyres that should last at least until 2015, and “soft” in truck tyres due to destocking.