What's going on?
Shares of French tire maker Michelin burned rubber on Tuesday, rising 13% after a quarterly update in which it offered a surprisingly upbeat forecast for 2019.
What does this mean?
Michelin’s stock price hit seven-year lows in October after it warned of slowing sales in Europe and China. So while the company’s quarterly profit, as reported late on Monday, was better than expected, those expectations were significantly lower than they were a few months back.
Investors found positives in Bibendum’s 2019 outlook, however. Despite joining the chorus of auto-didacts predicting weak demand for vehicles this year (and therefore weaker tire sales), Michelin still expects to grow its profit compared to last year.
Why should I care?
For markets: Michelin is French in name only.
Investors bought up Michelin’s stock on Tuesday, perhaps positively surprised by its rose-tinted growth prediction. Weak results last week from US rival Goodyear – where profit dropped last quarter – had honked off investors and led them to expect more of the same from Michelin. Goodyear makes 40% of its sales in the US, compared to a third for Michelin, according to FactSet, so what ails one usually ails both – but not this time, apparently. Shares in Michelin’s other rivals rose on Tuesday, likely as investors thought Italy’s Pirelli and Germany’s Continental would be better placed to grow their own earnings this year too.
The bigger picture: Crossroads for Michelin’s customers.
French carmaker Renault – a major customer of Michelin’s – owns a 43% stake in Japanese carmaker Nissan (and Nissan itself owns 15% of Renault). Nissan’s Tuesday announcement that its profit this year would be lower than expected, partly due to weaker US car sales – which shouldn’t have been a surprise to savvy investors – may therefore have led some to sell Renault’s stock. The two companies had been forging an ever-closer partnership under their former chairman. But now he’s on the naughty step, the hoped-for merger currently seems, like eating in a Michelin-starred restaurant, a somewhat outlandish possibility.