EUR 850.00 For Business Accounts Only

Morningstar | Michelin's 1H 2018 Results Mixed, Full-Year Guidance Confirmed; EUR 98 FVE Unchanged

No-moat-rated Michelin reported first-half 2018 diluted earnings per share of EUR 5.09, EUR 0.05 shy of the market consensus EPS estimate of EUR 5.14, but EUR 0.36 ahead of the EUR 4.73 EPS reported in 2017. Being a France-domiciled company, Michelin only reports revenue in its first and third fiscal quarters and full financial statements for the first and second fiscal halves. Currently trading at a 10% premium to our EUR 98 fair value estimate, we view 3-star-rated Michelin stock as reasonably valued relative to our estimate of future cash flows and returns on invested capital.

Management confirmed 2018 guidance. Even so, the company may implement additional price increases to partially alleviate currency and raw material headwinds. Management expects volume growth in line with markets, which implies roughly 1% volume growth for the full year. The company forecasts operating income greater than 2017 (EUR 2.742 billion), at constant currency, and structural free cash flow greater than EUR 1.1 billion. We model a 1% revenue decline (including currency), operating income of EUR 2.9 billion (as price and mix offset currency), and free cash flow of EUR 1.6 billion for 2018.

Despite our more optimistic forecast, our EUR 98 fair value estimate represents a 22% discount to the sell-side consensus EUR 126 price target. While our fair value is unchanged, since Michelin reported first-quarter revenue at the end of April, the consensus price target has declined 7% from EUR 135. We think the sell-side's consensus price target had priced Michelin shares as though economic cycles no longer existed and that natural rubber and petroleum prices would unceasingly remain low.

First-half consolidated revenue declined 4%, but excluding the nearly 7 percentage points of unfavorable currency translation, it would have increased 3%. The increase in organic revenue was driven by price and mix. Automotive and transportation were down 7% and 5%, respectively, while specialty increased 4% versus the first half of 2017. Despite a negative EUR 218 million negative impact from currency, we were encouraged that EBITDA margin remained constant at 18.7%. Negative currency effect, slightly lower volume, and higher raw material cost were offset by EUR 331 million in positive pricing and mix. Specialty tire group was the primary contributor as segment operating margin expanded 240 basis points in the first half of 2018, to 22.0%, compared with 19.6% last year. Automotive and transportation segment operating margins contracted 120 basis points and 30 basis points, respectively.