Michelin reported EUR 5.4 billion in revenue for the third quarter (it only reports full financial results every six months), an increase of 5.7% from EUR 5.1 billion last year, owing to favorable price mix and currency. With more than 40% of the company’s revenue derived from Europe, analysts had been expecting a greater slowdown in volume as well as weaker overall pricing.
However, thanks to Michelin’s better-than-expected revenue, declining raw material costs, and favorable pricing, Morningstar has raised its 2012 earnings per share estimate to EUR 9.15 from EUR 8.20. Additionally, they expect raw material pricing to remain favorable year over year through the first half of 2013. However, they believe Michelin’s pricing to its customers will become less favorable as Europe continues to struggle economically.
A couple of other negatives will soon affect the firm. Namely, a U.S. tariff on imported Chinese tires expired in September, and a contractual reduction is pending for the price of tires for specialty customers that have raw material pass-through clauses. This could lead to margin degradation beginning in the fourth quarter but will affect the firm more fully in 2013. This will cause margins to revert toward average levels by the end of our five-year explicit forecast period, partially offset by a greater portion of revenue derived from specialty tires, where operating profitability is substantially higher.
Even though some of the margin improvement in recent quarters was attributable to the growth of the specialty tire business, the company has been able to pass along price increases in its other markets. The specialty tire business has averaged 10.8% EBIT margin over the past 10 years compared with light-vehicle tire average margins of 8.6% and truck tires of 6.5%.
Third-quarter revenue increased 5.7%. Volume declined 3.5%, but was substantially offset by a 2.7% positive swing in price mix and a 6.6% favorable swing in currency. The increase in revenue was led on a percentage basis by the specialty group, rising 15.5% to EUR 864 million from EUR 748 million in the prior year.
The light-vehicle tire group’s revenue rose 5.0% to EUR 2.8 billion versus EUR 2.7 billion in the third quarter of 2011. North American and Asian newcar tire volume jumped 19% and 14%, respectively. European new-car tire volume was down only 5% while the larger aftermarket business declined 10%.
The truck group’s revenue was EUR 1.8 billion, up 2.7% from EUR 1.7 billion a year ago. North American truck makers’ tire volume rose 9% while most other regions were down between 3% and 8%. Truck aftermarket volume was flat to down in most regions.
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