A hard week from 13 to 17 December for the main international markets (Milan -2.0%, London +1.0, Frankfurt -0.3%, Paris +0.3%).
After Moody’s downgrade of Ireland (Aa2 to Baa1) and the decision to monitor Spain’s rating (AA1), fears for the financial stability of the peripheral countries in Euroland were reawakened. Bank and insurance shares suffered with the respective European benchmark indexes down by 2.8% and 1.4%.
The negative figures for new car registrations in Eastern Europe in November (-8.3% yoy) hit the Auto sector, down by 2.1% (DJ Stoxx Auto).
Tyre sector shares were hit too (Continental -6.5%, Michelin, -1.4%) suffering, in addition to the auto figures, from the continuous rise in the cost of natural rubber, with futures touching 4.7$/kg (RSS 3) and 4.6$/Kg (TRS20), .
Pirelli contained its losses closing the week almost at par (-0.3%) outdoing both the European benchmark index (+1.8pp) and the FTSEMib (+1.7pp). Share dealings fell with an average of approx. 1.6 million pieces exchanged (monthly average over 3 million).
Centrobanca’s upgrade of the share (BUY at 7.35€ from 7€) following its reviewed assessment of the tyre business is worth note: +9% at 2.68 billion €, a multiple P/E of 10.7x in 2011 in line with the average of its peers but up on Michelin by 16%. Forecasts are for average annual growth in tyre profits of 6.5% and an EBIT margin of 9.5% in 2013 (EBIT of 556 million €).
The reduced risk of M&A, high exposure on emerging markets, “sound debt position” and “safe dividend policy” were particularly appreciated according to brokers. The development of business in Russia also acted as an important stock catalyst.
IMI bank’s addition of Pirelli to the “securities to bet on in 2011” is also worth noting. Its focus on the premium sector and redistribution of production (with the projects in China, Latin America and Russia) will enable Pirelli to achieve and probably exceed its objectives despite the constant increase in cost of raw materials.