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Bridgestone's lead in sales and stock performance might increase as motorists choose cheaper tires
By Makiko Kitamura
Bloomberg News
Published on Saturday, Aug 30, 2008
Bridgestone Corp., the world's largest tire maker, trails Michelin & Cie. in customer satisfaction in every category surveyed by market researcher J.D. Power & Associates.
Paul Ciccoretti doesn't care.
The 46-year-old owner of a glass-coating company visited Mack Alger Firestone in St. Clair Shores, Mich., this week to buy tires for his 2007 General Motors Sierra pickup. He chose Firestone, which is Tokyo-based Bridgestone's U.S. brand, over Michelin because its prices were lower.
The French company has ''a great line of tires, but it gets a little pricey on the truck,'' he said. ''To be able to save $150 on a set of tires really made it easier to get into Firestones.''
As the U.S. economy slows, Michelin's higher pricing is helping Bridgestone. The Japanese maker's lead in sales and stock performance might widen as costlier gasoline and weakening consumer confidence spur mo
torists to choose cheaper tires.
Michelin, the world's second-largest tire maker and owner of the Uniroyal and B.F. Goodrich brands, announced Thursday it is scrapping plans to build a $740 million plant in Mexico. The company cited falling tire demand in North America.
''In this market environment, the higher quality doesn't help Michelin,'' said Paul Heaton, who manages $500 million in Japanese equities at Pyrford International Ltd. in London. ''I'd like a cheaper tire.''
Bridgestone's operating profit rose 31 percent last year on a 13 percent gain in sales, according to data compiled by Bloomberg News.
At Michelin, operating earnings increased 18 percent as revenue grew 3 percent.
For three consecutive years, Michelin has topped Bridgestone in U.S. product surveys by J.D. Power of Westlake Village, Calif.
''We don't think our tires are inferior to Michelin's at all,'' said Fusamaro Iijima, a spokesman for the Japanese company.
Bridgestone shares have declined 9.6 percent in Tokyo trading this year, less than Michelin's 43 percent drop in Paris. Only two analysts in a Bloomberg survey recommend buying the Japanese company's shares. Eight advise holding; two say to sell.
Seven analysts recommend selling Michelin, six say buy and three advise holding.
The French maker's tires are as much as 15 percent more expensive than Bridgestone products, said Olivier Vialle, Michelin's European marketing director for car and light truck tires.
A Michelin Destiny for a 2007 Toyota Corolla costs $106 in Los Angeles, according to Discount Tire Co., the largest independent U.S. tire retailer. Bridgestone's equivalent, the Potenza, costs $93.
Michelin's cheapest tire for the 2007 Honda Civic in the Chicago area is $99. That's $13 more than the Japanese maker's offering.
The higher prices reflect Michelin tires' longer life and better gas mileage, Vialle said.
''All things considered, the overall cost of a Michelin tire is still lower than those of its competitors,'' he said.
The gap between the two makes is set to widen next month. Michelin is raising North American prices as much as 12 percent and Bridgestone plans a 10 percent boost. Both have been hurt by higher raw-materials costs.
Bridgestone, which concentrates on replacement tires, ''can put in the price hikes without worrying too much about demand,'' said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo. He manages $2 billion, including the Japanese maker's shares.
''The current tight consumer spending environment is likely to make it difficult'' for Michelin to raise prices, according to an Aug. 7 report by Michael Tyndall, a London-based analyst at Nomura Holdings Inc. He recommends selling the French company's shares.
A slowing economy and high oil prices, which are 60 percent above the 2007 average, will cause new vehicle sales in the U.S. to decline 12 percent to 14.2 million units, according to J.D. Power. That's the lowest in 15 years.
The auto industry slump isn't expected to hurt replacement tire sales, which analysts say make up about 80 percent of Bridgestone's U.S. tire business. Replacements for cars, light trucks and heavy utility vehicles represent 70 percent of Michelin's global sales, according to the company Web site.
The replacement tire business earns profit margins of about 10 percent, compared with 4 percent or less for tires supplied to car makers, said Kunihiro Matsumoto, an auto-parts analyst at UBS AG in Tokyo.
Bridgestone is raising prices at least 10 percent for tires sold to global carmakers, spokesman Fusamaro Iijima said.
Higher prices will add $1.23 billion to Bridgestone's operating profit next year, exceeding the increase in material costs, said Takashi Moriwaki, a Nomura analyst in Tokyo who rates the shares ''buy.''
Bridgestone's pricing advantage means it might benefit the most from a 13 percent drop next year in crude oil forecast by Macquarie Securities Ltd. of Sydney, Australia.
Petroleum accounts for at least half the raw material cost of a tire, according to the broker. Oil is down 22 percent from a record $147.27 a barrel on July 11.
''They've been beaten down with the rise in commodities,'' said Lilian Haag, who helps manage $2.9 billion in Japanese equities including Bridgestone shares at DWS Investment GmbH in Frankfurt. ''That pain is going to ease.''
Haag said she bought more shares of the tire maker at the end of June, when its price-to-book ratio fell to 1. That's smaller than 1.1 for Michelin, an average of 1.3 for Japan's benchmark Topix index and 2.5 for the Standard & Poor's 500 Index.
Bridgestone Corp., the world's largest tire maker, trails Michelin & Cie. in customer satisfaction in every category surveyed by market researcher J.D. Power & Associates.
Get the full article here.
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