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Investing.com -- Jefferies has upgraded Michelin (EPA:MICP) to "buy" and designated it as the top pick in the tyres sector while downgrading Michelin (ETR:CONG) to "hold", citing diverging relative performance, valuation metrics, and outlooks for cyclical end markets.
According to analysts at Jefferies, Michelin’s shares have underperformed over the past 12 months, declining 8%, while Continental has gained 25%.
Jefferies views this performance gap as misaligned with fundamentals and valuation. The brokerage notes that Michelin is currently trading at its largest discount to Pirelli in over a year and at its lowest premium to Continental in two years.
The decision to upgrade Michelin is grounded in a stronger projected earnings trajectory.
Jefferies forecasts 20% EBIT growth for Michelin by 2026, compared to 10% for Continental and 5% for Pirelli.
Jefferies expects Michelin to reach its operating income target of €4 billion by 2026, outpacing the consensus forecast of €3.76 billion.
The analysts maintain a price target of €43, raised from €36, based on a 9x EV/EBIT multiple applied to 2026 estimates.
Michelin’s conservative balance sheet, with a leverage ratio of 0.4x compared to Continental’s 0.7x and Pirelli’s 1.4x, provides additional flexibility for capital returns or acquisitions, according to the report.
In contrast, Continental’s valuation premium relative to Michelin has narrowed considerably.
Jefferies notes that while Continental delivered strong first-quarter margins in its automotive segment, its overall exposure to the more volatile original equipment (OE) market poses a risk.
OE volumes have been weak across the sector, with Michelin reporting a 20% year-to-date decline and Continental seeing similar declines in both truck and passenger vehicle segments.
Jefferies has adjusted its estimates for Continental, now expecting 2025 EBIT of €2.9 billion and 2026 EBIT of €3.2 billion, representing modest year-on-year growth.
Despite solid margins in its tyres segment, Continental’s mixed performance in other divisions and limited upside to earnings contributed to the downgrade. The price target for Continental was reduced to €80 from €87.