(News Bulletin 247) – The financial intermediary has started monitoring listed tire manufacturers, devoting the group to bibendum as its favorite value in the sector.

Automotive equipment manufacturers risk greatly suffering from the electrification underway in the sector. At a conference last week, Stellantis CEO Carlos Tavares said the trend would put “significant pressure” on equipment manufacturers, according to comments reported by Reuters.

Bernstein does not say the opposite, far from it. “Western automakers are in the midst of a reinvention, driven not only by the shift to electrified powertrains, but also by the need to reduce vehicle costs and weight, optimize their own R&D, accelerate market and to position itself at the forefront of new software-based revenue streams in order to face increasingly sophisticated competition from Eastern countries,” describes the research firm.

“The real pain is yet to come. The impact this will have on the profit margins of many equipment manufacturers is still largely underestimated in our opinion,” he warns.

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The tire is “fantastic”

But the situation is different for tire manufacturers who appear as “a rare bright spot” in this moribund picture. Bernstein considers it a “fantastic” business, with high margins, limited cyclicality linked to significant after-sales revenues. “If growth appears unexciting, Michelin has managed to transform an average annual increase in vehicle production of 0.6% between 2013-2023 into growth in free cash flow per share of 8%,” underlines Bernstein.

“Asian competition has raised concerns for decades, but the technological and scale barriers are very real and give real pricing power to those at the top of the hierarchy,” continues the research firm.

Bernstein thus began its coverage of the various listed tire manufacturers this Tuesday. And the French champion Michelin is its favorite stock. The financial intermediary advises the stock to “outperform” with a price target of 43 euros, which gives the stock a potential of 16% at Monday’s close. This allows Michelin to limit the damage, the action being almost stable while the CAC 40, for its part, lost 0.3%.

Michelin remains the world number one and, according to Bernstein, the biggest innovator on the market. “Michelin remains best at launching new products in key high-performance segments and our analysis shows a flawless track record for ‘category killer’ launches, such as the Pilot Sport series,” write the broker’s analysts.

Margins destined to improve

This ability to innovate gives Michelin significant pricing power. For this reason, as well as a more concentrated sales breakdown on high-margin products (such as replacement or tires for mining machinery and specialty sectors, such as aeronautics or tractors), Bernstein is optimistic on the margins.

The financial intermediary expects an annual increase of 50 basis points (0.5 percentage points) per year until 2028, compared to 10 to 30 basis points per year, for the consensus. The sector operating margin, a key measure of the company’s profitability, would reach 14.1% in 2026 compared to 12.6% in 2023.

Remember that, last week, Michelin saw its stock price supported by a successful investor day. The group had reassured the market about its acquisition policy and set medium-term objectives higher than expectations. Bernstein nevertheless believes that the company has delivered prudent targets and thus has room to exceed its objectives.

The financial intermediary has, in addition to Michelin, a recommendation of “outperformance” on the Japanese Bridgestone, “market performance” on the Italian Pirelli, and “underperformance” on the German Continental.