Jefferies shuffles European auto parts ratings: Michelin raised, Conti cut to Hold

Jefferies upgraded Michelin to Buy with a €43 price target, citing its 46% market share in high-margin specialty tires and anticipated recovery in agriculture and construction equipment sales. Conversely, Continental was downgraded to Hold with an €80 price target due to its smaller specialty tire presence (4% market share), heavier reliance on the automotive original equipment market, and limited upside from the auto recovery; Jefferies notes Continental's valuation discount to Michelin has largely disappeared.

Analysis

Jefferies has revised its investment ratings for European auto parts manufacturers, upgrading Michelin (EPA:MICP) to Buy and downgrading Continental (ETR:CONG) to Hold, primarily driven by differing exposures to the cyclical specialty tyre market. Michelin, with a dominant 46% share in the €13 billion global specialty tyre segment (used in mining, off-road, and aircraft), is poised to benefit from an anticipated rebound in agricultural and construction equipment sales later in the year, as volumes in these high-margin areas are currently near cycle lows. Jefferies highlights Michelin's margin discipline and structural tailwinds, such as EV penetration and premium tyre growth, supporting a price target increase to €43, indicating a 28% upside. Conversely, Continental's smaller 4% share in specialty tyres and greater reliance on the automotive original equipment market, where recovery upside is now perceived as limited, led to the downgrade. The broker notes that Continental's valuation discount to Michelin has significantly narrowed, with Michelin now trading at a discount to Pirelli and almost in line with Continental, even as the outlook for the cyclical component of earnings improves. Both companies face headwinds from subdued mining activity and a gradual recovery in aircraft tyre demand, but Michelin is deemed better positioned. Continental's price target is set at €80, implying a modest 3% upside.

Key Decisions for Investors

• Investors may consider reallocating capital towards Michelin, given its upgraded 'Buy' rating, significant exposure to the recovering high-margin specialty tyre market, and a 28% upside potential to Jefferies' €43 price target.
• Holders of Continental should note the 'Hold' rating and limited 3% upside to the €80 price target, reflecting concerns over its automotive OE reliance and the diminished valuation gap relative to Michelin.
• Monitor key cyclical indicators such as agricultural and construction equipment sales, as their recovery is crucial for Michelin's performance, and assess the relative valuation between Michelin, Continental, and Pirelli for opportunistic positioning.