AI Partnerships And Cutting-Edge Products Will Shape The Future Of B2B Markets

Key Takeaways

• Expansion into services and experiences, and strategic partnerships are likely to boost revenue by diversifying offerings beyond traditional tire sales.
  
• Focus on innovative polymer solutions and high-margin products is expected to enhance revenue, net margins, and operating income.
  
• Declining OE sales and high production costs may negatively impact revenue and profitability amidst market uncertainty and competitive pressures.

Catalysts

Manufactures and sells tires worldwide.

• Michelin's expansion into services and experiences, utilizing customer intimacy and usage data for fleet insights, is likely to boost future revenue streams by diversifying beyond traditional tire sales.
  
• The company's focus on polymer composite solutions, with innovative products like energy-saving conveyor belts, could enhance revenue and improve net margins through differentiated offerings in growing B2B markets.
  
• Strategic partnerships, such as the one with Brembo for AI and data management in braking systems, reinforce Michelin’s technological edge, potentially leading to higher revenue growth and improved earnings.
  
• Ongoing industrial adaptation and restructuring, including exiting non-core segments and optimizing production footprint, aim to enhance operating margins by reducing costs and focusing on high-value segments.
  
• New product launches, particularly in the high-margin 18-inch-plus tire segment, and the accelerated digitalization initiatives are expected to positively impact revenue, net margins, and overall operating income.

Compagnie Générale des Établissements Michelin Société en commandite par actions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Compagnie Générale des Établissements Michelin Société en commandite par actions's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 9.3% in 3 years time.
• Analysts expect earnings to reach €2.7 billion (and earnings per share of €3.96) by about February 2028, up from €1.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 12.3x today. This future PE is greater than the current PE for the GB Auto Components industry at 9.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

Compagnie Générale des Établissements Michelin Société en commandite par actions Future Earnings Per Share Growth

Risks

• The sharp decline in original equipment (OE) sales across various segments in 2024 and the uncertain recovery timeline could negatively impact revenue and earnings if demand does not rebound as expected.
  
• Market distortions due to inflows of budget tires and anticipation of regulatory changes may continue to create unpredictability in sales volumes and competitive pressures, affecting overall revenue and net margins.
  
• The underperformance in the SR3 segment, particularly in mining and Beyond Road activities, could continue to drag on the company's profits if these sectors do not recover in line with management’s expectations.
  
• The postponement and market interpretation of the UDR lead to price pressures from Asian competitors, potentially impacting revenue and pricing power in European markets.
  
• High energy and production costs in Europe compared to Asia might limit Michelin's pricing flexibility, affecting profitability if these costs cannot be offset through efficiency measures or price adjustments.

Valuation

• The analysts have a consensus price target of €36.769 for Compagnie Générale des Établissements Michelin Société en commandite par actions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €42.0, and the most bearish reporting a price target of just €29.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €29.6 billion, earnings will come to €2.7 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of €33.49, the analyst price target of €36.77 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.