Tire industry

The profitability of this industry is highly dependent on the prices of raw materials, which are made from oil. From April to October 2018, oil demonstrated steady growth, breaking the 3.5-year-old maximum and trading at $ 65-75, that led to a stronger decrease in the quotes of most tire manufacturers relative to world indices. We believe now it is a good enter point to purchase the shares on this sector.





Bridgestone

Continental

Goodyear

Michelin

Pirelli
Market Cap

29.773B USD 29.361B EUR 4.577B USD 18.92B EUR 6.15B EUR
Profit Margin

7.99%

6.78% 4.48% 7.56% 8.31%
PE Ratio (TTM)

11.44

9.85 6.79 11.28

15.05
Enterprise Value/EBITDA 5.16

6.49 4.84 5.43

7.74

Pirelli (BIT: PIRC)

Ticker: PIRC
Buy: market
Target price: 7€

The Italian company is the world's fifth largest tire manufacturer. After IPO and a significant capitalization increase in 2017, from January 29, 2018 Pirelli began a steady decline from 7.99€ to 5.50€, losing more than 30% of its value. Pirelli downside movement exceeded decline of European indices for the same period for about 4-5%.

At the same time, the company has the best margin rate in the industry with an annual increase in gross profit. We expect raw materials cost depreciation and a target price of 7€ per share.





2018

2017

2016

2015
Net Income

431,600

176,392

135,063

1,738

Gross Profit

5,194,500

4,116,026

3,875,196

1,446,014

Technical analysis.

Year 2018. In the gap between October 10 and November 26, a “double bottom” pattern was formed, which could not realize its potential, and the price declined to new minimum values due to the fundamental reasons described above.

January 3, 2019 a key turning point came in sight. From this point, the trend went up according to all the canons of classical analysis. Bears stand on the defensive in the area of 6.10€ - 6.20€ per share. However, it is already clearly visible how the bulls are coming to the offensive with new forces. Every time the bulls’ preload becomes more dense.

The considered scenario is an “ascending triangle” figure, the breakthrough of which usually moves the price to the top of this punched triangle:

ii31

On the weekly we can see the complex and controversial situation, but both are considered in favor of bulls. The first option is an inversed head and shoulders, but with a bearish slope (such figures usually lead to a large-scale correction, but not a reversal of the trend). The second option is a double bottom (a head and right shoulder of the inversed head and shoulders figure).

Both options are directed on 7€ per share, which is confirmed by the daily schedule:

ii32

At the moment, the weekly indicators look very good and confirm the possible breakdown of the neckline of both reversal figures:

ii33

The Stochastic has gone beyond 80, the MACD has been growing steadily (working out triple convergence on the histogram and double on the lines). The RSI has broken through local resistance and is looking up.

Conclusion

We recommend to purchase Pirelli at current levels with a cost of 7€ per share.

Stop loss is quite complicated and not obvious here. The stop can be on price return back inside the reversal pieces with fixing below the center of these figures (the center is usually the decisive moment in the abolition of the reversal figure) or due to release of negative reports/news and the first strong red candle on weekly 1D.

ii34

Goodyear (NASDAQ: GT)

Ticker: GT
Buy: market
Target price 1: $26
Target price 2: $30
Stop-Loss: $18

American international company, manufacturer of tires and other rubber products, such as polymers for the automotive and industrial markets. The company is named after Charles Goodyear, inventor of vulcanized rubber. In terms of Enterprise Value / EBITDA, the company's shares are the most undervalued by the market, while the company pays dividends, which amounted to $0.60 per share over the last year. At the current price, it gives the right to looking forward to a 3% dividend income.

Technical analysis

Strong downside trend on all fronts. The weekly chart shows the bearish attitude and the suppression of any positive attempts of the bulls:

ii35

Everything would be very bad if it were not for one thing. The asset descended on the strongest, historical mirror resistance, which three times either stopped or unfolded the trend. Resistance range = $1 and is in the range of $18-19 per asset:

ii36

A rebound from this level confirms the bullish pressing, which is clearly visible on the weekly MACD. Four-fold discrepancy is a rather rare phenomenon. As a rule, shots from such discrepancies are very strong and they put the price to the entire height of the corrective movement in just a couple of weeks:

ii37

If the rebound takes place, the goals of the upward movement will be $22 and the range between $26 and $27, that corresponds to the upper limit of the downward projection. Subsequent growth will mark a hike to the upper boundary of the second downward projection, which takes place in the area of $30 per asset:

ii38

Conclusion

You can purchase shares either at current prices with a short stop under $18, or after the breakdown of the main downstream channel and its retest - around $22 per share. This movement will mark the beginning of working out the strongest bull convergence and possibly hiking towards the targets mentioned above: $26 and $30. These two numbers are the ultimate goals for profit taking.

Stop-loss when buying after the breakdown of the downside trend is placed below the last minimum of the first strong growing candle, which will again push off from the upper border of the main downward channel. Therefore, the stop-loss will be both below the minimum of this candle and on the return to the downward channel, which should mark the next extinguished bullish impulse and the continuation of the decline.

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