Tuesday, 11 February 2014

Views from Europe - Metro and Michelin

A month ago I wrote about 'the austere German Christmas' with particular reference to the German retail conglomerate Metro AG's Real supermarket chain.  Their Q1 numbers today had some more interesting insights.  The good news was that Metro's core cash & carry business posted its first like-for-like sales increase in more than a year and noted:

'signs of stabilisation in Western Europe...strong ebit improvement in Germany'


Stabilisation is certainly better than contraction and the improvement in operating leverage this implies undoubtedly will have driven the core German cash & carry ebit improvement too.

But - just like the European economy - don't get too excited.  The year to 30th September 2014 outlook issued by Metro is amazingly dull: 0% sales growth, 0% like-for-like growth, zero growth in 'adjusted ebit before special items', limited progress in net debt reduction...

I value a company with flat-line shorter-term growth prospects at x8 forward EV/ebit.  That's below Euro28 in Metro's case.  It is not a short given its material revenue base and barely Euro10bn market cap, but I am not excited by it. 

 
 
Michelin numbers share some similarities with the Metro ones in the sense that it starts well (7% free cash flow yield)...
 ...but then (negatively impacted by capex) this free cash flow is not sustainable.  Still enough to cover the dividend and I note Michelin's industrial (not pension) negligible debt level.


Additionally, on the micro-structures of the numbers I am still disappointed with the fading pricing power (admittedly offset by lower raw material costs)

 
 
The lack of sustainability of Euro1bn+ free cash flow generation means I am staying with my 'low Euro70s' view on the pick-up point for Michelin shares.
 




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