Morgan Stanley says tyre stocks lack clear upside; kept only Michelin at OW

Investing.com -- Tyre makers offer little reason for investors to increase exposure according to Morgan Stanley, as it cut ratings on Pirelli and Goodyear while keeping Michelin its sole Overweight rated stock in the sector.

The tyres sector trades at about nine times estimated 2026 earnings, broadly in line with historical averages and only slightly below auto parts suppliers, which MS calls overvalued.

Tyre makers are more defensive than car manufacturers but still face earnings pressure as margins weaken in the second half of 2025.

Morgan Stanley now expects sector earnings before interest and tax margins to fall by around 70 basis points in the second half and by more than one percentage point for full-year 2025, as softer volumes, a stronger euro and rising competition offset gains from pricing and lower raw material costs.

Pirelli was cut to Equal-weight from Overweight after strong share price gains pushed its valuation to roughly 11 times earnings, which already reflects its premium positioning.

Goodyear was downgraded to Underweight on weak momentum, high leverage and a lack of dividend support.

Michelin was kept at Overweight, with Morgan Stanley expecting margins to expand between 2026 and 2028 as the French group shifts further toward larger and premium tyres.

There is also a dividend yield of more than 5% and ongoing buyback programme at Michelin.

Continental remained rated Equal-weight. The brokerage said the German group, now a pure tyre business following a spin-off, offers balanced risk at current levels but needs to show progress on asset disposals and margin recovery.

While tyre makers have held up better than carmakers, Morgan Stanley prefers truck manufacturers at this stage of the cycle.

Risks include higher tariffs in key markets such as the U.S. and slower demand from China-based competitors gaining share.