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Short of the Week: Nokian Tyres


Finnish tire maker Nokian Tyres Plc has issued a profit warning, confirming its guidance for 2019 and providing preliminary outlook for 2020

In line with the guidance given in October 2019, net sales in 2019 with comparable currencies were approximately at the level of 2018 and operating profit margin was approximately at the level of 20%. In 2020, Nokian Tyres net sales with comparable currencies are expected to decline and operating profit to be significantly below the level of 2019.

European car and tire markets are soft

In 2019, the car and tire markets continued to be soft in Europe, which resulted in tightening competition. Winter tire demand in October-December was negatively impacted by the warm winter in Nokian Tyres’ key markets. During the year, the Russian market declined against expectations.

Low consumer spending, declining new car sales and increasing competition resulted in a significant increase in carry-over stocks at the year-end in Russia. In 2020, Nokian Tyres net sales and operating profit in Russia are expected to decline substantially.

Nokian Tyres continues with the company’s growth strategy in Central Europe and North America in 2020 in line with management plans. Operating profit in 2020 will include costs related to the North American expansion and other investment programs to support long-term growth, as communicated in 2018.

Time to short Nokian Tyres?

The current target price of the stock is around €22 with Inderes (a Finnish research house) and the recommendation is reduce – I would put a sell on this stock and start a short position – I believe the price will go below €20 on this stock and potentially as soon as next week if they touch the dividend.

The problem with Nokian Tyres is that it is very overextended. There is a bad market for tires in general and it is embarking on a new and costly expansion in the USA. Seventy per cent of its sales are coming from winter tires with climate change effecting Russian and Nordic sales. Minority owner Bridgestone sold it’s 10% stake and is no longer worried about Nokian Tyres’ competitive edge on winter tires.

CEO Hille Korhonen has a long career of building successful brands first with Fiskars and then as a CEO of Alko Oyj 2014-2017 (the Finnish Alcohol Monopoly – an easy client base), but after joining Nokia Tyres in 2017 she has been facing the toughest challenge of her professional career.

The last five quarters have been down since she took over in June 2017 and the sixth is on its way. Until the 2nd quarter of 2018 Nokian Tyres had had 12 quarters of positive growth. If they cut the dividend on February 4th then look out. The company will still be a decent value play with a good dividend of around €1.58 per share or 6.8% yield, but fundamentals do not support the risk of holding this stock right now.

Nokian Tyres will publish its Financial Statement Release 2019 on February 4, 2020 at approximately 2:00 p.m. Finnish time.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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