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

L'action Michelin se négocie à la bourse de Paris sous la cote "ML". La "Compagnie Générale des Etablissements Michelin" est un fabricant de pneus français dont le siège social est à Clermont-Ferrand, en France. L'entreprise a été créée en 1889 déjà et compte la bagatelle de 127'000 employés.

Valorisation de l'action Michelin

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. Il faut toutefois relever que cette baisse n'est pas liée aux résultats de 2019 mais sert plutôt à limiter l'impact du chinese virus sur le résultat et le FCF de 2020. On constate d'ailleurs que par rapport aux chiffres des dernières années, le dividende versé aux actionnaires possédait une marge certaine de progression. En effet, il se montait à :

• 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.

Les réserves de liquidés sont assez bonnes, avec un current ratio de 1.57 (en baisse), mais avec un quick ratio de 0.91. Cette différence s'explique par des stocks importants. Rien de trop inquiétant néanmoins pour une entreprise de ce calibre. La gross margin est correcte, avec 29.3% (en très légère baisse). La marge nette s'élève quant à elle à 7.26% et la marge de free cash flow à 6.3%. Le ROA est en très légère baisse, à 5.53%, tandis que le CFROA est à 10.48% et le ROE à 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.

Rendement de l'action Michelin pour l'actionnaire

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.

Une franchise, jusqu'à un certain point

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.

Par contre, comme nous l'avons vu, la dette de l'entreprise commence à prendre de l'ampleur. Les dépenses en capital sont elles aussi importantes, avec 111% du bénéfice moyen. Le secteur d'activité lui-même n'est pas de tout repos. Certes le pneu est un consommable, comme une cartouche d'encre. On doit les renouveler périodiquement. Mais l'industrie automobile est par nature fortement cyclique et elle impacte qu'on le veuille ou non le marché du pneu. Ainsi, le beta de Michelin est de 1.14 et sa volatility de 41.53%. On n'est donc assez loin de l'idée d'action "père de famille" qu'on peut acheter et oublier dans un coin.

Risques de l'action Michelin

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.