Story of the One Quality Company: Nokian Tyres

Nokian Tyres is a Finland-based quality company active in the tire manufacturing industry. The Company diversifies its activities into four main business segments: Passenger Car Tires, Heavy Tires, Vianor (tire chain sells tires under the Nokian brand), and other operations. The Company also diversifies its activities globally. Nokian Tyres is well known supplier of tires for cars, trucks and special heavy machinery mainly in areas with special challenges for tire performance: snow, forests and harsh driving conditions in different seasons.

 

Industry versus company

Nokian Tyres is continuously the industry leader in profitability. Company’s operational margin is 22 %, which is much better than its major competitors Bridgestone (8 %), Continental (7,5 %), Pirelli (13 %) and Michelin (7 %). Majority of the tires are manufactured in Russia (85 %) and exported to other markets, helping the group to save on labor costs and get the benefit of the weak ruble. Nokian Tyres is searching profitable growth specially in Central Europe and also in the North America. Additional sales have been sought from Japan, China, Turkey and Great Britain. Even if the sales remain stagnant they are able to improve profitability with cost restructuring, cheaper raw material and the power to raise prices.

 

Problems

We can easy remember last February when the company revealed that they have cheated on their tire test results. During the several weeks of media coverage the stock price plummeted temporarily.

Nokian Tyres has been also accused about unpaid taxes. There are 100 million Euro on the table and we have to wait the final settlement for a long time.

In addition the company has been very much Russia focused. The massive decrease in consumers’ purchasing power dampened the company’s growth prospects there. Although Nokian Tyres have decreased dependency on Russian sales by half Russia remains still both risk and opportunity.

 

Fundamentals

Nokian Tyres is fundamentally strong company. Balance sheet is stable, current ratio over 5 (quick ratio nearly 4), debt to equity only 0,17 and dividend yield is attractive 4,5 % (payout ratio little over 80 %). Efficiency is the trademark of the company. As stated above margins are industry based high-level. Cash flow is steady and strong and retained earnings growth has been about 8 %. The company has strong premium brand recognition, loyal customers and market leader position in the Nordic countries and Russia.

 

Valuation

First to notice that following valuation is based on Nokian Tyres PLC (NRE1V- OHEL) stock price 32,95 EUR. Right now valuation is a little bit challenging. Today P/E (ttm) is 31,4 which is not quite a realistic because of obviously under the normal (ttm) earnings 1,05 (look at the chapter problems). Average P/E ratio is 14-15 and realistic conservative average earnings are at the fewest 2,00 EUR per share. This means intrinsic value about 30 Euro per share.

Price to book is now 3,7 (average about 3) and book value per share during the last years relative stable between 9 to 10 Euro. This also indicate intrinsic value about 30 EUR per share or little less. Also counting owner earnings gives almost same result. Quite a high EV/EBIT 16,0 (median about 11) and price to sales 3,3 (even compared to high operational margin 22,0 %) give a sign of slight over-valuation regardless of attractive dividend yield.

 

Conclusion

Nokian Tyres is quite volatile in sales, earnings and valuation which gives the patient value investor good chances to choose right enter place. During the past three years the stock price fluctuated between €22 and €37. I recommend to wait a while and be ready when some bad news regarding the company, industry or market show up. For dividend income investor Nokian Tyres can be interesting option right now if you tolerate the volatility of the share price.

I have been the owner of Nokian Tyres since 2005 and increased my ownership couple of time later when stock price has plummeted and first of all valuation has been low enough to give the margin of safety.

 

 

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