Valuation of the Four Largest Pure Play Manufacturers in the Tire Industry

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Valuation of the Four Largest Pure Play Manufacturers in the Tire Industry

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Title: Valuation of the Four Largest Pure Play Manufacturers in the Tire Industry
Bridgestone, Goodyear, Michelin, and Pirelli
Author: Hendriksen, Christian; Hendriksen, Frederik
Abstract: The purpose of this Master’s thesis is to determine the equity value of the world’s four largest tire manufacturers, Bridgestone, Michelin, Goodyear, and Pirelli as of 1st January 2014 and establish which of stocks look most attractive from an investment perspective. This thesis aims at benefitting from the increased level of knowledge about peers that arise when multiple companies are analyzed, resulting in more accurate valuations for all companies. The thesis begins by introducing the industry and the main players in it. It then moves on to a strategic analysis of the tire industry using a top-down approach. PEST, 5 forces and internal analyses are applied to the industry and on firm level to reveal characteristics about the industry as a whole and how the four companies are positioned. Following the strategic analysis, a financial analysis dives into determining how profitable each company has been historically and how value has been created. For these findings to be comparable, a thorough reclassification of the companies’ financial statements is made to assure equivalent accounting standards. The combination of the strategic and financial analysis leads to a SWOT assessment of each company. The thesis moves on to forecasting future performance of the four companies and determine each company’s weighted average cost of capital based on the information obtained in the first parts of the thesis. Regression models are applied to forecast future sales, as the relationship between tire sales and macroeconomic growth proves to be strong. This is done on a regional basis for each company. Finally, the equity values of the companies are determined via the discounted cash flow approach and this is supplemented by multiple and sensitivity analysis. This leads to identifying the best investment opportunity. The findings reveal that Michelin is the most attractive stock, as it is estimated to have an upside of 23.5% compared to the level it traded at on 1st January 2014. Goodyear comes in 2nd with an estimated 9.6% upside but it is noted that Goodyear’s value is very sensitive to unfavorable changes in the underlying assumptions. Bridgestone and especially Pirelli are valued very close to their prevailing share prices at the time. It is concluded that it is advantageous that the thesis seeks to value multiple competing companies, as this has allowed for insightful comparisons of both historical and future performance. It has especially been beneficial when determining the financial drivers used in the forecasting. This is obviously desirable as it should enhance the accuracy of values determined.
URI: http://hdl.handle.net/10417/4867
Date: 2015-01-20
Pages: 205 s.
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