Analysts: Few reasons to buy Michelin stock
In light of only “modest” improvements on second half EBIT predictions and a “rather low quality free cash flow”, financial analysts are not optimistic about Michelin’s ability to sustain it share price.
In an investor’s report published 13 February, Morgan Stanley reported that Michelin’s 974 million euros of pre-tax profits (EBIT) in the period may have been 5 per cent above consensus expectations, but it was driven by gains in the mining tyres business.
This figure led to a 9.2 per cent margin overall (Morgan Stanley predicted 9.1 per cent). Propped up by a record-high 22.8 per cent margin in the specialty division (mining and industrial tyres). Looking at the company’s truck tyre results, financially analysts described their response as “disappointed”, with the company announcing (3.4 per cent margin versus the 4.5 per cent margins expected).
Weak underlying free cash flow
The disappointment is said to have stemmed form weak underlying free cash flow. “Once we back out the 403 million euro inflow from the disposal of the shares in Hankook, second half free cash flow came in at 234 million euros while full year ended at 422 million euros – greater than 200 million short of expectations.”
And what’s more the company’s apparent outlook is unlikely to attract and quick upgrades. According to the financial analysts, Michelin is targeting zero volume growth in 2012 (Morgan Stanley estimates the company will increase 2 per cent) due to weak demand in Western Europe and North America, which accounts for 69 per cent of sales).
“We don’t think guidance for higher EBIT in 2012 can trigger upgrades in a consensus already looking for around 10 per cent of year-on-year growth,” Morgan Stanley’s investor’s note concluded.