Falling Tire Demand And Rising Costs Will Undermine Margins

Key Takeaways

• Demand for replacement tires faces structural headwinds from electric vehicles, shared mobility, and lower private vehicle ownership, pressuring long-term revenue sustainability.
  
• Margin pressures mount due to intensified competition, rising sustainability costs, and capital investment needs, constraining pricing power, cash flow, and shareholder returns.
  
• Shifting toward premium products, digital services, and cost efficiencies, plus robust R&D and global reach, positions Michelin for revenue growth, margin improvement, and stability.

Catalysts

Engages in the manufacture and sale of tires worldwide.

• As the shift towards electric vehicles accelerates, the overall tire replacement frequency is expected to decline because of regenerative braking and advanced driving software, which could structurally reduce Michelin's long-term replacement tire volumes and ultimately suppress revenue growth.
  
• Rapid expansion of shared mobility options and continued urbanization threaten to decrease private vehicle ownership rates; this shift may drive a structural contraction in replacement tire demand, putting ongoing downward pressure on both total addressable market and recurring revenues.
  
• Intensifying competition from lower-cost Asian tire manufacturers, combined with persistent raw material cost volatility and higher input prices from sustainability regulations, is likely to erode Michelin's ability to maintain pricing power in premium segments, which could further compress net margins.
  
• Substantial ongoing capital expenditure requirements for industrial adaptation, smart factory upgrades, automation, and compliance with tightening sustainability and circular economy requirements may constrain free cash flow for the foreseeable future, limiting the company's flexibility to return capital to shareholders via dividends or buybacks and thereby impacting future earnings per share.
  
• Direct-to-consumer strategies adopted by OEMs and new entrants-especially automakers bundling tires with vehicles or offering in-house services-risk bypassing traditional tire suppliers like Michelin, reducing distribution-based revenue streams across segments and potentially resulting in long-term declines in both market share and operating income.

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

Assumptions

• This narrative explores a more pessimistic perspective on Compagnie Générale des Établissements Michelin Société en commandite par actions compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Compagnie Générale des Établissements Michelin Société en commandite par actions's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.9% today to 8.6% in 3 years time.
• The bearish analysts expect earnings to reach €2.4 billion (and earnings per share of €3.45) by about July 2028, up from €1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, down from 12.2x today. This future PE is lower than the current PE for the GB Auto Components industry at 10.0x.
• Analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

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

Risks

• Michelin's continued investment in premium, high-value-added tires such as those for electric vehicles and high-performance vehicles may support future gross margin expansion and revenue growth as secular trends favor upgrades to these segments.
  
• The ongoing expansion into service and solutions businesses like digital fleet management and connected mobility offers stable, recurring revenues, potentially improving both top-line growth and net profit stability in the long run.
  
• Strategic restructuring-including capacity reductions and asset disposals-should yield significant cost savings over the next several years, feeding directly into operating margin and free cash flow improvement.
  
• A strong innovation engine, backed by unique R&D capabilities and partnerships (for example with Brembo, and investments in AI and materials science) could solidify Michelin's pricing power and resilience, enhancing profitability and brand value even in periods of raw material cost volatility.
  
• Global industry trends such as increasing vehicle parc lifespan and robust growth of replacement tire demand in emerging markets, combined with Michelin's well-distributed manufacturing footprint and leading brand, are likely to underpin steady revenue and cash flow growth over the long term.

Valuation

• The assumed bearish price target for Compagnie Générale des Établissements Michelin Société en commandite par actions is €28.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Compagnie Générale des Établissements Michelin Société en commandite par actions's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €43.0, and the most bearish reporting a price target of just €28.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €28.4 billion, earnings will come to €2.4 billion, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 7.5%.
• Given the current share price of €32.54, the bearish analyst price target of €28.0 is 16.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.