Summary
- Michelin confirms that China is recovering. But they are still far away from the pre-COVID-19 levels.
- Michelin's July market data showed a continuation of the improvement seen in May and June in the Original Equipment Tires segment.
- There's positive data also in Europe so we reaffirm our valuation. Buy target confirmed.
Last time, here at the Lab tower, we analyzed how Michelin ( OTCPK:MGDDF ) could improve its market-leading position in Europe after having scrutinized how Nokian was exiting its Russian operation . As a reminder, by leaving Putin's country, Nokian's production capacity was reduced to 6 million from 23 million tires. We were positive about the fact that Michelin could take a bigger slice of the European end-market and would make Nokian a likely acquisition target.
Latest tires data
Today, Michelin released its monthly data and we can clearly say that we got it right. The July market evidence showed a continuous improvement already experienced in the May/June period in the original equipment tires division which is around 25% of Michelin's total group sales. This was supported thanks to:
- A positive sign regarding components availability, in particular semiconductors;
- A lower disruption in logistics;
- And more importantly thanks to the Chinese market reopening which benefited from a better comparison basis (-15% achieved in July 2021).
Michelin data yearly performance
Source: Michelin data & statistics (Excel file)
Looking at an aggregate level, we can clearly see that Michelin's original equipment business recorded a better performance in all the areas versus the 2021 numbers. On an annual basis, global tire demand has returned to the 2021 level supported by the strong North American performance but is still 14% lower than the 2019 numbers (pre-COVID-19 level).
On the other hand, as regards the replacement tires market, demand showed a slight deceleration compared to July 2021, with a more pronounced decline in the North American region that achieved a minus 7%. This was also due to the fact that there were two fewer working days. Regarding the Chinese market, demand was still partially offset by the COVID-19 zero case policy.
As we can note, Europe's performance was pretty supportive in the original equipment segment as well as in the replacement tires division. This is very supportive of our thesis and we should keep in mind that new commercial vehicle and car registrations were down by -14% and -20.3% in the old Continent.
Source: Michelin data & statistics (Excel file)
All in all, according to the latest data, we are still far behind pre-COVID-19 levels with a Q2 revenue better than expected, supported by price/mix evolution and currency exchange.
High-value segment
In the Michelin investment case, our attention will be focused on how the high-value division will perform. All in all, our internal team expects a lower demand in the global car tire market, however, we expect positive volume growth in the high-value segment (looking at the Wall Street analyst expectation, the market is forecasting a minus 2% on standard segment tires and a plus 7% on the high-value division). In the second part of 2022 and compared to the Q2 results, pricing power might not offset tire trend volumes. Moreover, the economic slowdown and the energy crisis might limit Michelin's volume recovery.
Conclusion and Valuation
Despite that, China is back to support Michelin's business. Europe's market share is increasing and the high-value segment could surprise Michelin's profitability. For this reason, our internal team believes that the French tire manufacturer is the most exciting investment choice within the sector. Thanks also to the excellent positioning of its products, we reaffirm our previous valuation, assessing the company with a 5.5x EV/EBITDA in line with its historical average.
For further details see:
Michelin: Tire Market Improvement Continues