BRDCF - Bridgestone Releases Its New 2030 Plan

Summary

• A new premium tire is born and will support the EV segment.
• Bridgestone raised the bar with a new plan until 2030.
• Short-term challenges weigh on the stock price. We wait and see for now.

After analyzing Michelin's half-year performance and its Russian exit implications ( MGDDF ), today we are scrutinizing Bridgestone accounts and the latest company announcement ( BRDCY ).

Before commenting on Bridgestone's " 2030 Long-term Strategic Aspiration " announced less than a week ago , it is important to highlight that the Japanese electricity mix has shifted from nuclear to gas & oil in the wake of the 2011 earthquake at the Fukushima nuclear reactor. Thus, as happens in Europe, higher bills are expected in the country. Luckily for Japan, most of its nuclear power capacity can be quickly reignited, and more importantly, Prime Minister Kishida's pro-nuclear stance will only be encouraged by current events and a return to more nuclear generation seems likely. In addition, we read some interesting research highlighting that any sign of inflation in Japan will spur consumption as the deflationary mindset gives way to fear of higher prices if household purchases are delayed. We do not agree and are more worried about the fact that non-discretionary costs increases could lead to a consumption deterioration.

Looking at the FY numbers released in February, the Japanese tire manufacturer outperformed Wall Street analyst expectations and announced a share buyback for a total consideration of ¥100 billion equal to 25 million shares (3.5% of its total market cap) surprising the investor community. Thinking about it, this time seems so far away. However, despite the ongoing market conditions, in Q2 Bridgestone improved its outlook on top-line revenue and adj. operating profit forecasts for the current fiscal year. This was due to the greater pricing delta thanks to the company's brand power.

Bridgestone 3.0 Journey

Looking at to the new action plan, Bridgestone aims to rebuild its profitability over the medium-term horizon. The company already improved 50 production plants spread around the world in order to achieve higher cost savings. Cost optimization and higher production efficiency will be key pillars in Bridgestone's new Commonality Modularity Architecture that will be fully operative by 2030. In addition, to enhance its margins, the company is also creating a new premium tire product for the electric vehicle era which is called ELITEN, and will aim to offset the expected decrease in demand for high-inch passenger car tires. Numbers in hand, Bridgestone is forecasting a short-term strategy and a long-term plan until 2030.

While we are confident that Wall Street analysts are positive on the interest numbers emphasised by the company, our internal team believes that they need to show some facts before any positive movement at the stock level. Bridgestone's 2030 financial target is considerably higher than the company's forecast for 2022. Currently, the tire manufacturer is forecasting almost ¥4 trillion in sales and an adj. operating profit of ¥450 billion with a margin of 11.5% - in addition, they foresee an ROIC of 9% and an ROE of almost 11%. 2030's guidance is 5.3 trillion in sales and an adj. operating profit of ¥820 billion with a margin of over 15%. ROIC and ROE at 12% and 13% respectively.

The company is also anticipating important investment for a total consideration of ¥2.8 trillion between 2022-2030 period and in the meantime, Bridgestone is communicating that shareholders' remuneration will increase. The company aims to raise the payout ratio from 40% to 50% over the timeframe and be proactively clever in the buyback.

Conclusion and Valuation

Looking at our just-released publication on Michelin , we see that the tire market is improving thanks also to the Chinese market reopening . This will definitely support Bridgestone accounts. However, in the short term, there are headwinds that cannot be ignored. Higher costs in raw material, energy, and logistic costs just to mention a few. Auto production is currently suffering from lower vehicle registration around the world. If this trend persists (as we expect), the tire sector will suffer. The company's valuations compared to the sector is higher than Bridgestone's historical average. Going to the numbers, we value the entity with an EV/EBITDA of 5x (we are forecasting ¥ 775 billion in 2023), arriving at a target price of ¥4,950. Based on the current stock price, we assign a neutral rating preferring Michelin within the sector.

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