February 21, 2014 2:36 am JST

Bridgestone pads fiscal 2014 forecast with safety cushions

KAZUYA HIRUTA, Nikkei staff writer

 TOKYO -- Investors were apparently so disappointed in Bridgestone Corp.'s fiscal 2014 operating profit forecast that they sent the stock down 4.3% on Wednesday. But a close-up analysis shows that the Japanese tire maker is just building a thick cushion against possible unwelcome surprises.

     Bridgestone projected Tuesday that group operating profit will climb 5% to a record 460 billion yen ($4.45 billion) for the year ending Dec. 31, missing the average analyst forecast of 475.7 billion yen.

     Let's take a look at three positive factors lifting Bridgestone's operating profit.

     One is an anticipated rise in sales volume, which is seen giving the operating result a 48.8 billion yen boost. The key U.S. market, where Bridgestone reaps around 30% of its overall sales, is logging growth in automobile output amid the economic recovery. And "demand is shifting from cheaper, Chinese-made tires to the likes of the high-end products that Bridgestone makes," says Masahiro Akita of Credit Suisse Securities (Japan).

     Another factor is growing sales of high-value-added items, or strategic products, which are seen pushing up operating profit by 29 billion yen. Bridgestone is enjoying strong demand for large tires used in construction and mining machinery, which account for nearly 10% of its total tire sales. This may come as a surprise, given that demand for mining machinery in such resource-rich countries as Indonesia is slumping. But the company can expect steady demand for replacement tires.

     The third is the depreciation of the yen, which will likely lift group operating profit by 21 billion yen. Bridgestone is assuming an exchange rate of 100 yen to the dollar for its earnings projections, a level close to the going rate.

     Negative factors include the increase in selling and administrative expenses, which Bridgestone says could push down its operating result by 40 billion yen -- more than triple the 13 billion yen adverse impact of last fiscal year. True, selling and administrative costs include logistics expenses, which go up as sales rise. But sales are projected to grow just 6% this fiscal year.

     Bridgestone will "steadily expend promotional costs in order to capture future business little by little," according to Chief Financial Officer Akihiro Eto. In fact, Bridgestone ramped up advertising and promotional spending last year to step up its branding. It aggressively sponsored events.

     Still, fiscal 2014 will be a good year "except for Japan, where the consumption tax will be hiked," Eto says. So it's not that the company would have trouble selling its products without boosting promotional spending.

     Bridgestone is also cautious in estimates for prices of natural rubber, expecting the cost to lower its profit by 23 billion yen -- a forecast that an analyst at a leading securities firm calls "conservative."

     By projecting higher cost increases, Bridgestone appears to be cushioning itself against unexpected declines in sales and other unanticipated events and practicing "safe driving" toward its goal of a third straight record profit. In fact, if sales costs end up rising just 20 billion yen, operating profit would jump to 480 billion yen -- beating the analysts' projection.