Bridgestone: Q3 margin highest since start of quarterly reporting

by SR on November 7, 2012

Bridgestone quarterly operating margin (%)

Profitability still improving

Conclusion: Q3 excellent, Q4 should be even better, but share price may be running out of steam. As the chart above shows, Bridgestone’s operating profit margin in the July – September 2012 quarter was the highest since the company began to release quarterly results in 2004. The October – December quarter is usually the seasonal peak for tyre suppliers and management guidance already implies a firm pick-up in sales in Q4. To my eyes the forecast improvement in profits looks far too small as it equates to an increase of only 12.2 billion yen compared to the previous quarter despite a predicted rise in revenues of 166.3 billion in Q4 compared to Q3. So, I think that operating profit in Q4 will exceed guidance of 82.7 billion and hit 90 billion or slightly more, leading to full-term OP for 2012 of 296 billion yen and EPS of about 227 yen, which would put the stock on 8.2x THIS year’s earnings.

Bridgestone historical annual sales and operating profit and management guidance for 2012

And next year? In 2011 the story was higher prices for tyres. In 2012 the story has been lower costs for rubber. In 2013 key issue will again be natural rubber prices. If natural rubber prices continue to fall (see chart below showing average quarterly prices) then Bridgestone should be able to post growth in profits even if growth in volumes is non-existent. Low growth in tyre volumes of 1-2% seems to me to be the most likely scenario at this point. Year-to-date Bridgestone’s share price is up 7.1%, out-performing the TOPIX index (+2.3%). Still, unless natural rubber prices plunge and profits soar as a result it seems unlikely to me that Bridgestone’s stock will perform well in 2013.

Conversely, if the Chinese auto market turns around, you should switch out of Bridgestone and into a ‘China’-themed stock such as Nissan. Natural rubber prices tend to rise when the China auto market is in growth mode and fall when it is in contraction (see this post for details).

Thailand natural rubber prices averaged by quarter in US dollar per kg

A good quarter

Bridgestone posted July – September 2012 revenue of 737.4 billion yen (-4.9% year-on-year, -3.3% quarter-on-quarter) and operating profit of 70.5 billion yen (+41.6% year-on-year, -0.4% quarter-on-quarter). For the first 9 months of the year revenues now stand at 2,226.3 billion yen (-0.4% YoY) and operating profit has reached 204.3 billion yen (+42.5% YoY). It’s unlikely that Q3 2012 represented the highest ever quarterly margin, as Bridgestone posted an operating profit margin of 10.4% in 1998 and 11.4% in 1999, but it’s probably in the top 5 or 6 quarters recorded by the company.

The slight decline in Q3 revenues relative to the previous quarter looks disappointing given that Q3 for the tire market in Japan as a whole rose by 3.8%. Bridgestone’s Japan revenues fell 9.8% sequentially in Q3, while the Americas declined by a gentler 3.8% quarter-on-quarter. ‘Other’ regions (mostly emerging markets) posted a sequential increase of 2.1%, while Europe held up surprisingly well, down just 0.4% sequentially. Still, Europe accounts for only 10% of Bridgestone’s sales (before intra-company eliminations), compared to 31.2% for Japan 38.6% for the Americas and 20% for ‘Other’ regions.

However, Bridgestone is not just about tires. We do not have a breakdown of the company’s sales by both region and product, but tyres (84% of revenues) fell by only 1.9% quarter-on-quarter whereas “diversified products” fell by 10.6% quarter-on-quarter. I suspect that Bridgestone’s tyre sales in Japan rose quarter-on-quarter and that the industrial materials of the “diversified products” segment posted a significant double-digit decline relative to the previous quarter. As just noted, tyre sales for the Japanese market as a whole grew by 3.8% sequentially in Q3 and I think it very unlikely that Bridgestone – which has a market share of 40-45% in Japan – did not grow at similar rates. Incidentally, in Q4 2012 we should get a significant seasonal rise in tire sales in Japan.

Average quarter-on-quarter change in Japan tire sales volumes

Rubber prices falling again

A monthh ago we noted that natural rubber prices were rising but argued that, as there is no sign of a sustained improvement in demand for either tyres or industrial rubber, higher natural rubber prices would be difficult to maintain. As the chart below shows, that rally petered out and most of the gains have been given back. Nevertheless, from a long-term perspective prices are at very high levels. Maybe there is room for further falls in price in 2013. I expect increased supply of latex in 2013 as trees planted in 2005-2006 mature and start to be harvested.

Thailand natural rubber daily price in US dollars per kg

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