Bridgestone – With Upside Potential

Bridgestone Corp (5108.T) is the world’s largest manufacturer of tires and rubber products, followed by Michelin (France), Goodyear (US), Continental (Germany) and Pirelli (Italy). Bridgestone makes tires for passenger, commercial and agricultural vehicles as well as aircraft and motorcycles.[mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”] The company has a global market share of around 15 percent. Bridgestone also offers a variety of products for the chemical, automotive, construction and electronic industry as well as sporting equipment.

Bridgestone has about 180 manufacturing plants and R&D facilities in 26 countries and sells products in more than 150 countries worldwide. The Americas is the largest market of Bridgestone, accounting for roughly half of its total revenue with the US making up almost 40 percent. Japan generated 19 percent to the revenue while the rest of Asia-Pacific accounted for 16 percent. With a growth rate of 22 percent, Europe, Middle-East & Africa have been the strongest growing regions last year, accounting for 17 percent of the revenue.

Bridgestone was founded in 1931 and is headquartered in Tokyo, Japan. The name is derived from the translation of the founders last name Shojiro Ishibashi, meaning ‘stone bridge’ in Japanese. The company is listed on Tokyo’s stock exchange since 1961. Its shares can also be traded in Germany and the US. Major shareholder is the Ishibashi Foundation with an ownership of around 10 percent. 82 percent of the shares are in public hand.

With a workforce of over 142 thousand employees, Bridgestone reported revenues of 2,674bn JPY (23.7bn USD) and profits before tax of 307bn JPY (2.7bn USD) over the first nine months of 2018. While revenue growth remained flat, profits increased by 5 percent compared to the same period a year ago. In 2017, revenues increased by 9 percent, while profits remained flat. The operating margin of around 12 percent is above the industry average. Bridgestone’s cash reserves decreased by 22 percent to 389.5bn JPY (3.5bn USD), while debts have been reduced by half to 190bn JPY (1.7bn USD) over the first nine months of 2018. The company shows a stable balance sheet with acceptable profitability and financial strength. The equity ratio is at 63 percent and the gearing, defined here as total liabilities to total equity, at 59 percent. Japan Credit Rating Agency’s current rating of Bridgestone is AA+ with a stable outlook. Next results will be announced mid of February 2019.

Bridgestone’s shares broke out of a downtrend and gained around 9 percent from its low in September. The attempt to cross the upturning 200 moving average line could give the stock an additional momentum. The company is priced at 11 times earnings, 1.2 times book value and at 10 times cash flow. The latest dividend yielded 3.7 percent. 8 out of 15 analysts have currently a ‘hold’ recommendation on the stock.

Our conclusion: Bridgestone shows a stable balance sheet with an acceptable profitability and financial strength. The valuation is reasonable with a PE ratio near a 2-year low and a PB ratio near a 5-year low. The global market for tires is expected to grow steadily with an automotive outlook which is predicted to stay stable despite tariffs. Lower prices for raw materials could further improve Bridgestone’s profitability. The company is well positioned in a strong competitive environment. Revenues and profits grew by 2.4 and 7.2 percent respectively over the last five years. Assuming continued stable economic growth, we expect the share price to increase between 15 to 20 percent over the next year.

AIS Rating: ★★★☆☆

	2013	2014	2015	2016	2017	2018 Q1-3 only
EPS (JPY)	258	383	363	339	375	291
Change	18%	49%	-5%	-7%	11%	14%

P/E	P/E SECTOR	P/B	P/CF	Equity Ratio*	ROE	LIAB./ Equity**	Div YLD
11	16	1.2	10	63%	13%	59%	3.7%

* Equity / Total Assets, ** Total Liabilities / Equity
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