Compagnie Générale des Etablissements Michelin (ML:PAR): Analysis

The action Michelin is traded on the Paris Stock Exchange under the ticker "ML". The "Compagnie Générale des Etablissements Michelin" is a French tire manufacturer headquartered in Clermont-Ferrand, France. The company was founded in 1889 and has a whopping 127,000 employees.

Valuation of Michelin shares

The company with the "bibendum" is one of the few big companies that are still trading at a fair price. The Michelin share price is in fact:

• 9.32 times recurring earnings
• 10.31 times average recurring earnings
• 1.23 times book value
• 1.91 times tangible assets
• 10.74 times current free cash flow
• 14.94 times the average free cash flow

Enterprise value is 16.34 times FCF, which is also decent. However, it is up to 22.59 compared to the average FCF. EBIT is 10.83% of EV and EBITDA is 11.2%. Again, this is quite affordable.

Dividend

The dividend of Michelin shares is certainly not extraordinary, with 2.19%. This is explained by the fact that it has just been reduced, which is never a good sign. It should be noted, however, that this decrease is not linked to the 2019 results but rather serves to limit the impact of the Chinese virus on the 2020 result and FCF. It should also be noted that compared to the figures for recent years, the dividend paid to shareholders had a certain margin for growth. Indeed, it amounted to:

• 20.45% of current recurring profit
• 22.45% of average recurring profit
• 23.71% of current free cash flow
• 32.77% of average free cash flow

Although I usually avoid dividend cuts like the plague, I think that this one is justified. It shows that Michelin's management is taking responsibility and thinking a little further than the end of their noses. It even lays the foundations for future increases.

Result & balance sheet

Unlike the dividend, the profit has followed a nice steady rise over the last five years. Obviously this year risks changing the situation. Cash reserves have been yo-yoing since 2015. Michelin has therefore been struggling for some time to create value for its shareholders. This is reflected in the share price, which has been stagnating since 2015.

Liquidated reserves are quite good, with a current ratio of 1.57 (down), but with a quick ratio of 0.91. This difference is explained by large inventories. Nothing too worrying, however, for a company of this caliber. The gross margin is correct, with 29.3% (down very slightly). The net margin amounts to 7.26% and the free cash flow margin to 6.3%. The ROA is down very slightly, at 5.53%, while the CFROA is at 10.48% and the ROE at 13.24%.

Debt

The long-term debt ratio is slightly up, at 18.15%. Michelin would need nearly ten years to repay its entire debt using its free cash flow. This is far too long. The debt represents 0.75 times the equity. The increase in debt over the last few years has represented a return for the shareholder of -3.07% per year. This further puts the dividend yield, already reduced, into perspective.

Michelin share price performance for shareholders

Fortunately, the number of shares outstanding tends to stagnate, or even decrease very slightly. Thanks to this, but especially thanks to the good dividend paid before the reduction, the total return for the shareholder has been just positive over the last five years, at 0.62% per year. This is another explanation for the weakness of the French tire manufacturer's share price. The company has the means to increase its total return since it only represents 9.38% of the average FCF. We imagine and hope that Michelin will be keen, once the health crisis is over, to amortize its debt and increase its distributions again.

A franchise, to a certain extent

You don't improvise overnight in the tire industry. The global market is dominated by Bridgestone (1st), Michelin (2nd), Goodyear (3rd) and Continental (4th). These four companies share more than 2/3 of the pie. Michelin therefore has a dominant position, but competition is tough among this quartet. This explains why profitability and profitability are correct, but not extraordinary. Michelin's overheads are also fairly well controlled, at 49.5%. Goodwill is on the rise.

On the other hand, as we have seen, the company's debt is starting to grow. Capital expenditures are also significant, with 111% of average profit. The sector of activity itself is not easy. Of course, tires are consumables, like ink cartridges. They must be renewed periodically. But the automobile industry is by nature highly cyclical and it impacts the tire market whether we like it or not. Thus, Michelin's beta is 1.14 and its volatility is 41.53%. We are therefore quite far from the idea of a "family man" stock that we can buy and forget in a corner.

Risks of Michelin action

We have seen that the company has some liquidity concerns. The Z-Score (Altman), with 2.14, places Michelin in a gray zone: no imminent risk of bankruptcy, but no absolute security either. The F-Score (Piotroski) is in the same vein, with 5. Michelin's financial strength is therefore just average and the growth potential of the share price is limited.

Conclusion

Michelin is held at 84% by institutions. We will mention a few well-known names, such as Vanguard, BNP Paribas, Blackrock and Amundi. So there are already a lot of people gravitating around the company. This is not necessarily a happy competition for small shareholders like us. One good point, however, is that the stock is currently correctly valued. This is already rare enough at the moment to be worth mentioning, especially for a company of this size. Be careful, I say correctly valued, not that it is cheap.

In short, a stock to keep if you already own some or to watch for a possible future purchase.