Michelin Raises Prices; Have Tire Makers Bottomed?

In today's Wall Street Journal, David Pearson reports on Michelin's rare move to raise prices for car manufacturers in: Michelin Increases Prices of Tires Sold to Car Makers as Costs Rise.

In an effort to combat surging energy and raw-material costs the world's largest tire company, Michelin SA of France, has said it will raise the prices of its tires sold to auto manufacturers by 6-8%. It's about time and actually a rare move since tire makes usually pass on higher costs to consumers of replacement tires instead. Sharp declines in profitability at Michelin and rivals Goodyear Tire & Rubber Co of the U.S. and Bridgestone of Japan in recent earnings reporting reflect the higher prices of rubber and oil.

Michelin said last month it expects a 23% increase in raw-material prices in 2006, representing an additional cost of €800 million ($1.02 billion). The company had previously estimated the extra raw-materials cost at €540 million for the year, compared with €450 million in 2005.

Michelin's Paris traded shares jumped 2.3% on the news closing at €47.48 ($60.74).

Comment: The latest earnings reports by tire makers have been anything but pretty and offered very little promise. Michelin's decision to raise its prices however, changes the situation and means other tire makers will likely follow suit. But is it safe to say that shares of tire makers have bottomed? I have my doubts but would expect a nice pop over the near-term and can imagine a positive scenario where rubber and oil prices level off or come down and at the same time sales of tires remain robust on strong sales in BRIC economies and modest increases in more advanced economies. Goodyear (GT) recently traded at a 52-week low and is still down about 37% over the past 52-weeks and calendar year. Cooper Tire & Rubber (CTB) keeps falling and is now down about 48% on the year. Related: Japanese Tire Co's Flattened by Higher Costs

Michelin (FR:012126), Bridgestone (JP:5108), Yokohama Rubber (JP:5101), Cooper Tire (CTB), Goodyear (GT) 1-year comparison chart: