MGDDY - Michelin: All In Line!

Summary

• The company's latest tire data are supportive and confirm our investment thesis.
• Positive evolution of Michelin's “non-pneumatic” products. Stellantis' capital increase of Symbio might be a key catalyst.
• Despite the company outperforming the market, Michelin is still trading at a depressed valuation. Our buy rating is confirmed.

After having analyzed Michelin's ( MGDDF ; MGDDY ) Q3 results , today we are back to comment on the company's latest update. Since our buy rating publication called Tire Market Improvement that we released in early September 2022, the company is up by more than 25% compared to the S&P 500 return of -2.55%.

Our buy case recap is still valid and is based on the following:

1. Nokian's Russian exit implications and further acceleration in the European tire market
2. China reopening. In November, there was a balance between original equipment tires (YTD results at +9%) and replacement tires sales (YTD declined at -13%)
3. A compelling valuation versus its historical average with a safe dividend yield. In Q2 and also in Q3, despite lower volumes, Michelin's accounts were positively influenced by the price/mix evolution, in detail, the company totally offset higher raw material costs as well as other inflation headwinds with price increases.

According to Pirelli Tire Market Watch , despite the ongoing challenges and the economic slowdown, the strong demand for tires continues and this data is also reinforced by the latest Michelin update. After our comment on the July market data, we can confirm that the French tire manufacturer already delivered positive numbers in Q3 and exceeded expectations in October and November. This is emphasized by the company's latest release, in detail, the EU tires market is up year-to-date both at replacement and in the original equipment sales. This fully supports Mare Evidence Lab's buy rating point.

Source: Michelin data & statistics (Excel file)

We should also point out that Michelin is currently outperforming the tire market. Tracking the ACEA Passenger & Commercial vehicle registrations, we see a performance of -6.1% and -15.5% respectively in the 2022 eleven months comparison.

During the Q3, we were not surprised to see that Michelin confirmed its 2022 guidance. Looking at the aggregate level, the company saw its turnover rise by 20.5% to €20.7 billion, driven by a price/mix effect of 14.3% and a positive exchange rate effect of 6.5%, while volumes fell by 2.4% due to the exit from Russia and the periodic lockdowns in China. As a reminder, Michelin's cessation of Russian activities had an impact of €195 million and non-recurring charges stood at - €273 million. Michelin has a truly global footprint in terms of geographical sales diversification and is well distributed across the three main areas (Fig 1). More importantly, Michelin is rebalancing its industrial footprint lowering EU dependency, and increasing the APAC area and also the US (Fig 2). We are in favor of this move because it increases the local-to-local ratio, and with a better supply chain also reduced inventory requirements (and logistics constraints).

Fig 1

Source: Michelin Q3 results presentation (Fig 2)

Aside from the tire data, Michelin is also focusing on “ non-pneumatic ” products and is working on fleet management and hydrogen mobility . The latter was recently all over the news thanks to Stellantis. Indeed, the Italian car player would like to focus its hydrogen activities on investing in Symbio. The French Symbio is a joint venture between Michelin and Faurecia to power commercial vehicles with hydrogen. In detail, Symbio is working on developing fuel cells with zero emissions which are alternatives to electric batteries. Stellantis entered into exclusive negotiations to acquire a " considerable " stake in Symbio and looking at the company's latest project called HyMotive, the French JV aims to increase its production capacity up to 100k fuel cell systems per year by 2028. The hydrogen engines will be destined for commercial vehicles and heavy vehicles with a promise to recharge in 3-5 minutes and to guarantee a range of 1000 kilometers without producing CO2 emissions. Thanks to its Dare Forward 2030 strategic plan, Stellantis foresees an expansion in hydrogen vehicles starting from 2024 in the EU and from 2025 in the US. Symbio's transaction is expected to close in early 2023 and is subject to regulatory approval; however, we expect a quick green light from the authorities. Only a few days ago Akio Toyoda, president of Toyota, reiterated his thoughts: the battery-powered car is not the definitive solution for the zero-emissions goal. Even if hydrogen is still a residual investment, here at the Lab, we believe that it might be an important optionality for the future of cars. There is another reason for the car manufacturers, this year, thanks to raw material costs, battery prices have risen after 12 years of decline. What could happen in an automotive market totally dependent on lithium, cobalt, and nickel?

Conclusion and Valuation

Regarding Michelin's valuation, the company is still trading at a lower EV/EBITDA multiple versus its historical average. In detail, based on our 2023 numbers and over the next 12-month horizon, we are at a 4.47 multiple compared to an average of 5.5x, so we decided to confirm our target price of €33 per share (versus the current at €28 per share). The dividend is safe as Michelin also has a solid balance sheet and we are not pricing in any additional upside coming from “ non-pneumatic ” products. Stellantis' capital increase of Symbio was not disclosed so we are not providing any supplementary details in the sum-of-the-parts valuation.

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