Fresh market perspective
For 40 years industry analyst Saul Ludwig graced the pages of this publication with his astute comments on the tire industry. This year marks a changing of the guard. Ludwig’s protégés, Nick Mitchell and John Healy, are offering their insights, presenting fresh perspectives on market angles that affect your business.
John Healy joined Northcoast Research in Cleveland, Ohio, in May 2009 as managing director and equity research analyst covering the business services sector. Prior to joining Northcoast Research, Healy was a senior analyst and associate at FTN Midwest. Early on in his career, he worked at McDonald Investments and Oppenheimer & Co.
Healy has developed unique and proprietary research methods which allow him to produce value-added advanced research. Additionally, in 2011, Healy was named as a “top stock picker” by the Financial Times.
Nick Mitchell joined Northcoast Research in April 2009 as a senior vice president and equity research analyst. Prior to joining Northcoast Research, Mitchell spent four years as an analyst at Ardor Capital LLC, a value-orientated long/short equity hedge fund. He was responsible for contributing to the firm’s analysis of investment opportunities, economic time series, and the technical and sentiment background of various financial markets.
Prior to joining Ardor Capital LLC, Mitchell spent two years at FTN Midwest Securities Corp. where he worked as an equity research associate for several analysts on the firm’s consumer team.
Mitchell began his financial career at McDonald Investments Inc. where he was an investment consultant within the firm’s brokerage division. Mitchell holds the chartered financial analyst and chartered market technician designations.
MTD: What do you see as the defining moments in the tire industry in 2012?
Mitchell/Healy: Great question. First of all there’s the expiration of Tariff 421 as it resets the competitive landscape for the industry, which thus far has seemed to not to have created as much downward pressure on pricing (per average tire) as originally feared. Secondly, there’s the number of acquisitions that have been occurring at the wholesale and retail levels across the industry. It will be interesting to watch how consolidation will impact the buying power of larger players in years to come.
MTD: What affect has the elimination of the Tariff 421 had on the market thus far?
Mitchell/Healy: For retailers, we have yet to see price points at the consumer level change materially; as a result, we believe retailers are keeping this benefit. As retailers are keeping this incremental profit, the question we ponder is for how long will the industry remain disciplined in light of weak industry demand?
Wholesalers, similar to retailers, appear to be keeping some of the savings, but we believe they have passed more of the savings along to dealers.
MTD: Do you expect the union to ask for another tariff?
Mitchell/Healy: If industry volumes remain weak and either Chinese imports re-accelerate in terms of share gains or a price battle breaks out, the union could always ask for some assistance from the government. That considered, we do not anticipate something material to occur in 2013.
MTD: Through your conversations with tire dealers, what is their attitude about business going forward?
Mitchell/Healy: As our monthly commentary (for the Your marketplace column) has suggested over the past few months, consumer behavior remains unpredictable and sporadic. For the most part, consumers continue to defer tire purchases until they are forced to address the issue. Because of this, dealers remain very cautious in their outlook for meaningful demand recovery in 2013.
MTD: What is currently happening with tire prices? What do you see them doing the rest of the year?
Mitchell/Healy: Tire prices at retail have remained very resilient as we have seen little price fall-off since the expiration of Tariff 421. Looking further into 2013, we expect moderate declines in tire pricing, primarily as a function of lower input costs. However, if demand weakens, there is potential for further price erosion beyond that caused by lower commodity costs.
MTD: What is going on in the original equipment tire market segment? Do you see the car manufacturers demanding anything different? “Greener” tires? Cheaper tires?
Mitchell/Healy: Vehicle manufacturers are continuing to seek out more quality fitments. OEMs are looking for large diameter fitments as well as those that provide lower rolling resistance and a smoother ride. The real question becomes: Will the consumer be willing to pay for these higher quality tires at the time of their first replacement?
MTD: Do you see tire buyers embracing the “green” tire technology?
Mitchell/Healy: We see only marginal interest by the consumer for the sake of being green. That said, if the tires provide increased fuel efficiency at a good price some dealers are seeing their customers “go green.”
MTD: What is happening to raw material prices currently and what do you expect in the future?
Mitchell/Healy: Raw material prices continue to be lower on a year-over-year basis, with the largest declines in natural rubber, butadiene, and a number of structural components. We believe without a huge pick-up in demand, prices will remain stable sequentially as we move further into 2013.
MTD: What is happening with tire wholesalers? Will the big continue to get bigger by buying smaller wholesalers?
Mitchell/Healy:: Consolidation at the wholesale level remains a major theme. We believe this trend will continue as tire SKU proliferation will increase and the complexities of running a wholesale business will become even more challenging.
MTD: Please comment on Monro buying up tire dealerships. What lies in their future?
Mitchell/Healy: While Monro was very active in terms of acquiring dealerships ahead of the expiration of Bush tax cuts in 2012, we think transaction activity will moderate in 2013 as the company moves to integrate deals completed in recent months.
MTD: What were the U.S. replacement shipment highlights in 2012 vs. 2011 for passenger, light truck and medium truck tires?
Mitchell/Healy: There were few highlights as industry volumes have been weak across the board. At the time of this interview (late in 2012), we note that consumer replacement shipments have only been positive three months thus far in 2012. When looking at the performance of the truck tire market, things have been equally as challenging as replacement demand grew only in two months during the year.
MTD: Consumers have deferred tire buying. Will they release pent-up demand?
Mitchell/Healy: We continue to hear that the value and broad line segment of the tire remains the weakest. In our opinion, this tire buyer is probably a lower income buyer and unemployment rates in the spectrum of the employment market have lagged. We believe recovery in employment (especially at the low-end) is needed before pent-up demand is released.
MTD: What is the state of dealers’ and manufacturers’ inventory levels at the start of the year?
Mitchell/Healy: As for passenger and light truck tires, tire dealers continue to tell us that they remain conservative with their inventory levels.
That said, at the margin in our most recent survey of tire dealers, dealers noted that inventories continue to track at the high-end of ideal levels.
We believe that in coming months, dealers will continue to be conservative with inventory levels as the consumer remains unpredictable and the absence of a significant pick-up in the economy.
As for medium truck tires, it’s hard for us to answer at this point. We’re watching as the market develops.
MTD: Automotive service remained a bright spot for tire dealers throughout 2012. What will happen in this segment in 2013?
Mitchell/Healy: We continue to expect service activity to outperform the tire market in 2013. In our opinion, consumers need to maintain their cars to ensure their ability to get from point A to point B.
As a result, consumers will spend on maintenance and repairs that are deemed essential.
We think the service and repair side of the business continues to face headwinds from weak traffic trends to the bays and consumers’ desire to defer all nonessential repairs. We expect these issues to weigh on results again in 2013 unless we see a meaningful improvement in the health of the economy. That said, we expect the service and parts business to outperform volume trends on the tire side of the business.
MTD: Thanks, Nick and John. ■