Morningstar | Michelin's 3Q Revenue Mixed, Full-Year Guidance Tweaked; EUR 98 FVE Unchanged
No-moat-rated Michelin reported third-quarter revenue of EUR 5.7 billion, an increase of 5.2% from EUR 5.3 billion reported last year. Excluding 1.6 percentage points of negative currency impact and 3.4 percentage points from the acquisition of Fennar, organic sales would have been 3.4% higher. Being a France-domiciled company, Michelin reports only revenue in its first and third fiscal quarters and full financial statements for the first and second fiscal halves. Currently trading in line with our EUR 98 fair value estimate, 3-star-rated Michelin stock appears reasonably valued relative to our estimate of future cash flows and returns on invested capital.The increase in organic revenue was driven by a 2.9% volume increase and a 0.5% improvement in price and mix. Automotive and transportation were down 8.5% and 1.4%, respectively, while specialty increased 70.1% (including acquisition) versus the third quarter of 2017. Excluding acquisitions, we estimate the specialty group would have increased 47.1%. While automotive and transportation groups' revenues were negatively affected by slowdowns in Europe and China, strong growth in mining and construction led the specialty group higher.
Management tweaked its 2018 guidance. While management expects volume growth in line with markets, it now expects slowdowns in automotive and transportation to continue in the fourth quarter. Still, 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, unchanged from previous guidance. We model a 2.2% revenue decline (including currency), operating income of EUR 2.8 billion (as price and mix partially offset currency), and free cash flow of EUR 1.5 billion for 2018.
As we indicated in our Oct. 16 note, we are dropping coverage of Michelin.
Compagnie Generale des Etablissements Michelin is active in the tire and mobility-related service markets. Co. manufactures, distributes and sells tires for all kinds of vehicles, publishes maps and guides and operates a number of services. Co.'s operates in three segments: Passenger car/Light truck tires and related distribution; Truck tires and related distribution and Specialty businesses segment including tires for specialty vehicles and maps and guides. Co. distributes its products through two tire distribution networks: Euromaster (Europe) and TCI (U.S.A.) and its brands include Michelin, BFGoodrich, Kleber, Uniroyal, Warrior, Kormoran, Riken, Taurus and Tigar.
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