Michelin reported first-half diluted earnings per share (EPS) adjusted for one-time items of EUR 3.91, down EUR 1.02 from the same period a year ago. Management confirmed its full-year guidance that operating income before special items will be stable year over- year, free cash positive after approximately EUR 2.0 billion in capital expenditures, and greater than 10% return on capital employed. Our EUR 80 fair value estimate is less sanguine than management’s guidance.
Management is expecting greater decline in raw rubber commodity pricing, improved product mix, and better operating leverage in the second-half of 2013 with an upturn in demand. The decline in rubber pricing has reached a trough. With global economic conditions slowing aerospace and mining tires (high margin businesses), product mix may not be as favorable as management expects. High capital expenditures to add more tire capacity to reach emerging markets may be too aggressive, eroding operating leverage. This 3-star rated stock may look more appealing as the Street catches up with our perspective.
Michelin’s consolidated revenue for the first-half of 2013 was EUR 10.2 billion, declining by 5.1% from EUR 10.7 billion reported a year ago. Volume declined 1.5% while price and currency were down by 2.3% and 1.4%, respectively. Car and light truck revenue was down 3.3% on a 0.5% decline in volume, reflecting weak pricing. Truck tire revenue was off 4.5% on a 1.8% decline in volume.
Operating income dropped 12.7% to EUR 1.2 billion from EUR 1.3 billion in the first-half of 2012. Operating margin was 11.3%, a 100-basis-point erosion from last year on weaker car and light truck operating leverage plus higher corporate expenses. Car and light truck operating income was down 5.3% and margin eroded 30 basis points to 10.3%. Truck operating income declined 2.9% while margin expanded 10 basis points to 6.5%.
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