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European tire makers have plenty of tread left

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Considering the car crash that is the European auto manufacturing industry, it is no small achievement that the tire business continues to keep to its side of the road. Results from Michelin and Goodyear on Tuesday illustrate how difficult a feat that is but also that it is not impossible.

New car registrations in the EU are at a 17-year low and replacement sales are the weakest in a decade. Volumes are down globally, too – Goodyear sold 20-per-cent fewer tires in 2012 than in 2007. Yet neither company's earning power appears excessively diminished by the downturn.

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The difficulty for tire makers is their dependence on the mass car market. Michelin's volumes were down 6 per cent in 2012 on the previous year, and Goodyear's were down 9 per cent. Most of that was the result of the shrinkage in Europe, and it is hurting. But the tire companies can at least adapt to the problem.

Goodyear says that its 2013 group operating income is likely to be between $1.4-billion (U.S.) and $1.5-billion – below the $1.6-billion target set two years ago. It is closing its farm tire business in Europe, the Middle East and Africa (based in Amiens, France). Goldman Sachs estimates that this plant was operating at barely a quarter of its capacity. Goodyear says its bottom line should improve to the tune of $75-million annually after the move has been completed. Michelin is turning round its truck tire segment, which accounts for under a fifth of group revenue – margins in the division almost doubled in 2012.

Given the tough operating climate, it is instructive that tire makers' shares have had such a spectacular nine months. Michelin is up 50 per cent since last June, and Goodyear is not far behind. The commodity cycle favours them, for the moment, and their defensive qualities are attractive. Both companies still trade at a discount to their sector. They have not run out of road yet.

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