Michelin Spins Out On Dim Outlook

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Shares in French tiremaker Michelin skidded 3.27% on June 23 after Credit Suisse analysts downgraded the stock on fears oil prices will continue to rise, squeezing automotive suppliers as motorists curtail their driving.



"Both car and truck annual mileage should steadily decline, thereby lengthening the tire replacement cycle," Credit Suisse (CS) said in a note to investors. Shares in Michelin (MICP.PA), the global No. 2 tiremaker behind Bridgestone (5108.T) of Japan, have fallen 54% in the past year, including a steep plunge in April after the company issued a profit warning. Increased raw material costs and the weak dollar also are whacking Michelin's bottom line.



Tiremakers like Michelin are hit especially hard when motorists stay off the road, because these companies make most of their profits from selling replacement tires rather than the original equipment supplied with new cars. "It's pretty much the perfect storm for the sector," Credit Suisse analyst David Arnold says.



Vulnerable at The High End

Michelin looks particularly vulnerable. Some 14% of its revenues come from sales of truck replacement tires, a business where demand has fallen 13% in Europe and North America in the last year. Its German rival Continental (CONG.DE), by contrast, draws only 5% of revenues from truck replacement tires.



Michelin also suffers more than some competitors because it's positioned at the high end of the market, with 74% of its sales in mature markets such as the U.S. and Western Europe. Motorists in those regions are more likely to limit their driving than those in emerging markets, Arnold says, because oil-price hikes in many poorer countries have been cushioned by government subsidies designed to stimulate growth.