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Shares drop about 10% at Michelin

Tire maker lowers full-year profit forecast as result of higher raw material prices and lower demand

By Laurence Frost
Bloomberg News

Published on Wednesday, Apr 30, 2008

Shares of Michelin & Cie. fell the most in a decade after the world's second-largest tire maker cut its full-year profit forecast, showing it's not as recession-proof as investors had thought.

The shares fell as much as 10 percent after Michelin said slumping demand and soaring raw-material costs will put a bigger-than-expected dent in 2008 profit. At least five analysts slashed their Michelin ratings or estimates.

The stock closed at 60.62 euros, or $94.80, down 9.2 percent.

''Tire makers are theoretically the place to be in a downturn,'' said Michael Tyndall, a London-based Nomura analyst with a ''neutral'' rating on Michelin. ''But this time, rising raw-material prices are making it tougher to protect margins.''

Tire stocks are a traditional refuge because replacements generate more profit than those supplied to automakers. That's changed as raw materials prices defy the economic slowdown, narrowing margins on tires sold directly to consumers. Michelin's struggle could be compounded by the premium prices it charges and a greater dependence on truck tires than its peers.

''Michelin is significantly more exposed to raw materials'' through its truck tire sales, said Arndt Ellinghorst of Credit Suisse, one of a minority of analysts who were recommending that investors sell the stock before the company's profit warning. ''It also has a lot to lose if people walk away from spending a 20 [percent] or 30 percent pre
mium on a tire.''

Michelin's North American unit produces BFGoodrich and Uniroyal brand tires.

Michelin stock has fallen 22 percent this year, valuing the company at 8.8 billion euros ($13.7 billion).

The tire maker said yesterday that operating profit may fall in 2008, after saying Feb. 15 that sales and operating margin would ''make further progress.'' Investment banks, including Citigroup Inc., Merrill Lynch & Co. and Natixis SA, downgraded the shares.

''Michelin is struggling to increase replacement-tire prices fast enough to counter higher raw-material head winds,'' John Lawson, a Citigroup analyst in London, said in an e-mail. ''Demand is weakening but input costs are not going down — rather the opposite, which is very unusual.''

Tire makers have been raising prices over the past two years to offset the higher cost of supplies including natural rubber, up 13 percent in the last 12 months.

Michelin currently charges up to 30 percent more than competitors such as Goodyear Tire & Rubber Co., the largest U.S. manufacturer, for equivalent tire models in Europe. At U.S. online retailer TireRack.com, the cheapest all-season Michelin tire for a 2006 Toyota Camry costs $95, which is 38 percent more than the alternative from Japan's Bridgestone Corp.

Truck tires account for about a third of Michelin's sales, compared with 20 percent for Goodyear and Hannover-based Continental AG.

Michelin also is midway through a reorganization program that calls for a 30 percent productivity increase and 10 percent operating margin by 2010.

Cost savings from the reorganization ''will largely be absorbed by industrial inefficiencies,'' including lower capacity utilization at western European and North American plants, and rising commodity costs, said Thomas Besson, a Merrill Lynch analyst in London, in a report cutting his recommendation to ''neutral'' from ''buy.''

Merrill also removed Michelin from what is called its ''Europe 1'' and ''Most Preferred'' lists of recommended shares.

First-quarter sales fell 2.6 percent as a declining dollar cut the value of revenue converted into euros, Michelin said Monday.

The company forecast a 10 percent decline in demand from North American truck makers, wider than an earlier predicted slide of 0.5 percent. It trimmed market estimates for replacement car tires in all regions except Asia.

''Michelin has a lot of macroeconomic exposure, and first-quarter growth was slower in its mature markets, the U.S. and Europe,'' Chicuong Dang, a Paris-based analyst at Richelieu Finance, said in an interview with Bloomberg Television.

Shares of Michelin & Cie. fell the most in a decade after the world's second-largest tire maker cut its full-year profit forecast, showing it's not as recession-proof as investors had thought.

Get the full article here.


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