Bridgestone: hikes 2012 profit guidance

by SR on August 7, 2012

Bridgestone annual sales and operating profit (billion yen)

Solid performance confirms favourable environment

Bridgestone announced its Q2 (April-June 2012) results after the market close this afternoon and they were good. I haven’t talked in detail about Bridgestone since this post in early June and this one on Europe a couple of weeks later. That’s partly because I’ve been following other ideas but mostly because I saw nothing new to add to what is a simple story. Sales are trending up. Prices are trending up. Costs are going down. Exposure to Europe is small. Company should raise its own guidance. And that is what has happened. Strictly speaking (see the table below) the company cut its sales forecast by 3.4% and raised its operating profit forecast by 6.7%.

Bridgestone previous and revised management guidance

Put in its historical context, this revision leaves us with the figures in the chart at the top of the page (and below). Management is now forecasting an increase in revenue of 3.5% in 2012 compared to 2011 and an increase in operating profit of 50% for 2012 compared to 2011. For the year as a whole the operating profit margin is likely to hit 9.2%, which is a substantial improvement over the 7.4% OPM of 2007 and by far the best figure of the past decade.

Bridgestone annual operating profit margin (%)

The best Q2 on record

Quarterly sales came in at 762.7 billion yen, up 1.1% YoY and up 5% QoQ. The April-June 2012 quarter operating profit of 70.8 billion yen (+87.4% YoY) was not quite as high as the recent peak posted in 2007 of 87.1 billion. However, note that the tyre market is very seasonal and that in Japan the sale of winter tyres in the October-December (Q4) quarter represent the peak of the year in terms of revenues and usually profits. Even in the same year, one would normally expect Q2 profits to be smaller than Q4 profits. The Q2 quarter just finished recorded the second highest quarterly operating profit since quarterly disclosure began and is easily the highest ever profit for any Q2 (see below). Q4 will likely be higher than Q2.

Bridgestone quarterly sales and operating profit (billion yen)

By quarter, the company’s operating profit margin looks like this (note that the Q2 operating profit margin of 9.3% is only a fraction lower than the previous high of 9.4% recorded in Q4 2007).

Bridgestone operating profit margin by quarter (%)

Is there further upside beyond company guidance? That largely depends on natural rubber prices in my view. Management’s sales forecast of 3.5% looks reasonable; in one of the previous posts mentioned above I suggested growth of 2-3% YoY in 2012 as a ballpark figure and that still feels about right to me. Conversely, unlike 2008-2009, I don’t see signs of a tremendous deceleration in tyre demand in the United States (Bridgestone’s main market) so I think it’s unlikely that sales will implode in the second half of 2012. Yes, Goodyear has been having a few problems but we shouldn’t automatically assume that Bridgestone is in the same boat. Goodyear had similar issues in the second quarter of 2011 and those too turned out to be largely specific to that Goodyear; despite its rival’s difficulties, Bridgestone itself had a great year.

Demand, prices, raw material costs

Demand for tires is not expanding rapidly, but appears to be holding its own. In the US, Bridgestone expects replacement passenger tire sales volumes to rise by 1% year-on-year in 2012, although truck and bus tires are slated to fall by 7% YoY. In Europe, the smallest region for Bridgestone, the company is anticipating a 10% YoY fall in replacement passenger car tyres. Passenger vehicle tyre sales in all Asian markets are expected to rise: +13% YoY in Thailand; +11% YoY in Indonesia; +16% YoY in India; +11% YoY in China, for emerging market growth of +12% overall. That seems respectable growth.

Of course, prices have been a major part of the tire story for the past several years, rather than just volumes. In brief, the major global tyre suppliers were squeezed by increases in raw material prices and decided that raising prices to pass on these higher input costs was a more sensible and lucrative strategy than fighting for market share. That price discipline appears to be holding. The chart below shows the CPI for tires in the United States. Prices have risen significantly and remain firm. Supply is tight due to very strong OEM (new car) tyre demand coming mostly from the Japanese auto manufacturers like Toyota and Honda, out to take share after their problems in 2012. In the short term it will probably be difficult to raise tire prices further but if they stay where they are, that in itself would be positive.

Tire CPI in the United States (1982-1984 = 100

Finally we have costs. One major part of costs is raw materials, and a large chunk of that is natural rubber. The price of rubber in Thailand, the major producer, has been plunging. On an annual basis this means that Bridgestone will probably pay on average around $3.75 per kg in 2012 compared to $5.00 in 2011. Now, management doesn’t disclose the details, but if we assume that 55% of its rubber usage (1.89 million tons in 2012) is natural rubber and it pays $3.75/kg, then its natural rubber costs for the year would be about $3.9 billion. At a forex rate of 80 yen to the US dollar that $3.9 billion would be 311.9 billion yen. As production will be flattish, Bridgestone used about the same amount of rubber in 2011 as it plans to use in 2012. So keeping forex and volumes constant, the difference in total natural rubber costs between 2011 (assuming $5.00/kg) and 2012 (assuming $3.75/kg) would be about 104 billion yen. More than 100 billion yen of positive impact on earnings, just like that. To put that in perspective, 2011 operating profit was 191.3 billion yen.

Thailand natural rubber prices in US dollars per kg

What does the market think? The market hasn’t been very nice to Bridgestone at all. Although the stock has just about outperformed Topix, it hasn’t done nearly as well as auto and auto parts stocks like Toyota and Denso, or even smaller competitor Yokohama Rubber. To me that seems unjustified given these strong results. Perhaps today’s results will spark a change in attitude among investors over the next few weeks.

Bridgestone share price performance vs other stocks and Topix

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