Investing.com -- UBS analysts highlighted premium tire manufacturers as well-positioned to handle inflationary pressures, with Continental emerging as the firm’s top pick in the sector amid a mixed demand environment.

September data revealed modestly softer passenger car end-market conditions, while truck trends remained supported by recovery in North American original equipment manufacturing. UBS estimated third-quarter global passenger car markets declined 1% year-over-year, with truck markets broadly flat.

September, the key month for European winter tire sell-in, showed weakness at negative 4% year-over-year. However, UBS noted this could be primarily driven by lower China imports rather than underlying demand weakness.

Industry checks suggested high dealer inventories in Europe, mostly in budget tire segments. Well-capitalized distributors appeared willing to hold stock longer in anticipation of higher future selling prices, delaying inventory normalization. In trucks, Michelin continued to report weak replacement tire sales in North America due to lower imports and slowed economic activity.

The rise in oil prices to around $100 per barrel has weighed on tire stocks, although this level is already embedded in fiscal 2026 assumptions of several companies. Any meaningful impact from higher raw material costs is unlikely to be felt before early 2027. UBS expected companies to start commenting on the magnitude of the 2027 raw material headwind in the upcoming earnings season.

1. Continental (Buy, €90 price target): UBS named Continental as its most preferred name in the tire sector. The firm sees upside risk to the company’s 2026 fiscal year guidance in the near term. Medium-term drivers include further margin expansion driven by Americas turnaround and optimization of other business lines.

UBS noted Continental should return more than 20% of its market capitalization by the first half of 2027 and trades at an unjustified valuation discount to peers.

2. Pirelli (Buy, €7.1 price target): The Italian tire maker has delivered solid execution and should be positioned to introduce a more attractive capital allocation strategy, particularly following recent changes in its shareholder structure, according to UBS.

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