Company Reports

Narrow-moat Continental published results for first-quarter 2024 and hosted a call on May 8 following the disappointing preliminary headline financial figures released on April 17. Consolidated revenue of EUR 9.8 billion and adjusted EBIT margin of 2% fell short of company-compiled consensus at EUR 10 billion and 3.7%, respectively, and the share price fell after the announcement. Continental cited unfavorable mix, foreign-currency headwinds, and continued labor inflation as contributors to the poor quarter. There was no redeeming element in either release, with automotive, tire, and ContiTech businesses all missing estimates. Despite this, management reiterated full-year guidance.

Narrow-moat Continental reported disappointing preliminary first-quarter key financial figures, sending shares down over 5% intraday. Consolidated revenue of EUR 9.8 billion and an adjusted EBIT margin of 2% fell short of company-compiled consensus at EUR 10 billion and 3.7%, respectively. Continental cited unfavorable mix, foreign-exchange headwinds, and continued labor inflation as contributors to the poor quarter. There was no redeeming element in the release, with the automotive, tires, and ContiTech sectors all missing estimates. Despite this, management reiterated full-year guidance. We continue to forecast 2024 revenue marginally below the midpoint and adjusted EBIT margin at the bottom end of guidance. We maintain our EUR 108 fair value estimate and view the shares as undervalued.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue can marginally outpace our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy returns on invested capital, and our narrow economic moat rating.

Narrow-moat Continental reported fourth-quarter 2023 results that were below FactSet consensus expectations, missing sales by 1.5% and earnings per share by 42%. Nonetheless, we are constructive on the results, as the company capped off a difficult year by achieving fourth-quarter sales growth of 1.3% and adjusted operating income growth of 68.9% despite persistent supply chain constraints, inflation, and geopolitical uncertainties. We believe Continental’s results provide evidence that management is on the right path to achieve its previously outlined midterm financial targets. We reiterate our EUR 163 fair value estimate, which represents a 128% premium over the current share price.

Narrow-moat-rated Continental held an investor day in which management presented its strategy for the ContiTech, tires, and auto business segments. The firm’s midterm (3-5 years) targets include annual revenue growth that exceeds the percent change in global light vehicle production by 3-5 percentage points, revenue of EUR 51 billion-EUR 56 billion, and 8%-11% adjusted EBIT margin. 2023 guidance was confirmed with revenue at EUR 41 billion-EUR 43 billion and 5.5%-6.5% adjusted EBIT margin. We model 2023 revenue at the midpoint of management guidance on new business backlog but the low end of margin guidance due to uncertainties like supply chain disruption and inflationary cost pressures. We raised our fair value estimate EUR 1 to EUR 163, due to the time value of money. The 5-star-rated shares of Continental currently trade at a compelling 57% discount to our new fair value.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow by roughly 2-4 percentage points more than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.

Narrow-moat-rated Continental reported disappointing third-quarter earnings per share before special items of EUR 1.63, missing the EUR 1.87 FactSet consensus by EUR 0.24 but EUR 2.47 better than the EUR 0.84 loss a year ago as supply chain disruptions lessened but inflationary cost pressures and currency offset. Consolidated revenue missed consensus by 2% and slipped 2% to EUR 10.2 billion from EUR 10.4 billion last year, while organic revenue increased 3%. Automotive organic revenue increased 5%, flat with global light vehicle production. Tire organic revenue was nearly flat, up 0.3% even though volume slipped 3%, due to pricing and mix. ContiTech organic revenue rose 1% mostly on automotive volume growth and customer recoveries, but weaker industrial volume.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow by roughly 2-4 percentage points more than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.

Narrow-moat-rated Continental reported second-quarter earnings per share before special items of EUR 1.56, missing the EUR 1.90 FactSet consensus by EUR 0.34 but EUR 2.77 better than the EUR 1.21 loss a year ago as the chip shortage lessened. Consolidated revenue beat consensus by EUR 37 million, rising 10% to EUR 10.4 billion from EUR 9.4 billion last year while organic revenue increased 12%. Automotive organic revenue jumped 20%, outperforming a 15% increase in global light vehicle production by 5 percentage points thanks to new business and increased volume, partially offset by some customer price recoveries being delayed. Tire organic revenue rose 6%, even though volume slipped 3%, due to pricing and mix. ContiTech organic revenue rose 7% mostly on nonauto pricing and automotive volume growth, but weaker industrial volume.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow by roughly 2-4 percentage points more than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.

Narrow-moat-rated Continental reported first-quarter earnings per share EUR 1.91, trouncing the EUR 1.14 FactSet consensus EPS by EUR 0.77 and EUR 0.68 better than a year ago as the chip shortage lessened. Consolidated revenue beat consensus by 3%, increasing 11% to EUR 10.3 billion from EUR 9.3 billion last year. Excluding positive currency effect, organic revenue increased 10%. Automotive organic revenue jumped 17%, outperforming a 10% increase in global light-vehicle production by 7 percentage points thanks to new business, increased customer production, and raw material customer price recoveries. Tire organic revenue rose 5%, even though volume slumped 9%, due to pricing and mix. ContiTech organic revenue rose 8% mostly on non-auto pricing but also on automotive volume growth. The 5-star-rated shares of Continental currently trade at a compelling 59% discount to our unchanged EUR 159 fair value estimate.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow by roughly 2-4 percentage points more than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow by roughly 2-4 percentage points more than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.

Narrow-moat-rated Continental reported fourth-quarter earnings per share before special items of EUR 1.05, missing the FactSet consensus by EUR 0.13, but is EUR 0.29 better than a year ago as the chip shortage improves. Consolidated revenue beat consensus by 3%, increasing 17% to EUR 10.3 billion from EUR 8.8 billion last year. Excluding positive currency effect, organic revenue increased 12%. Automotive organic revenue jumped 18%, outperforming a 5% increase in global light vehicle production by 13 percentage points thanks to new business and raw material customer price recoveries. Tire organic revenue rose 12% on pricing, while ContiTech also increased 12% mostly on nonauto pricing and volume growth. The time value of money added EUR 4, making our new fair value estimate EUR 150, up from EUR 146. The 5-star-rated shares of Continental currently trade at a compelling 48% discount to our fair value estimate.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow at a faster rate than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.

Narrow-moat-rated Continental reported third-quarter earnings per share before special items of EUR 1.70, beating the EUR 1.58 EPS FactSet consensus by EUR 0.12 and EUR 0.43 better than the EUR 1.27 EPS reported a year ago when the chip crunch was at its worst. Consolidated revenue beat consensus by 4%, increasing 29% to EUR 10.4 billion from EUR 8.0 billion last year. Excluding positive currency effect, organic revenue increased 23%. Automotive organic revenue jumped 34%, outperforming a 29% increase in global light vehicle production by 500 basis points thanks to new business and raw material customer price recoveries. Tire organic revenue jumped 16% on pricing, while ContiTech organic revenue increased 16% mostly on non-automotive pricing and volume growth. The time value of money added EUR 4 while changes to our model subtracted EUR 2, making our new fair value estimate EUR 146, up from EUR 144. The 5-star-rated shares of Continental currently trade at a compelling 59% discount to our fair value.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow at a faster rate than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.

Narrow-moat-rated Continental reported second-quarter earnings per share before special items of EUR 1.39, beating the EUR 1.24 EPS FactSet consensus by EUR 0.15, but down EUR 1.34 from the EUR 2.73 EPS reported a year ago. Consolidated revenue beat consensus by 3%, increasing 13% to EUR 9.4 billion from EUR 8.4 billion last year. Excluding currency and consolidation effects, organic group revenue increased 8%. Automotive organic revenue rose 8%, outperforming nearly flat global light vehicle production by 800 basis points thanks to new business and raw material price recoveries. Tire organic revenue jumped 11% on pricing, while ContiTech organic revenue increased 6% mostly on non-automotive pricing and volume growth. The time value of money added EUR 3 while changes to our model subtracted EUR 2, making our new fair value estimate EUR 144, up from EUR 143. The 5-star-rated shares of Continental currently trade at a compelling 55% discount to our fair value.

Considering industry trends in connectivity, electronics, and safety, we think Continental's revenue will grow at a faster rate than our estimated 1%-3% long-term average annual growth in global vehicle production. Above-industry-average research and development spending enables consistent product and process innovation, supporting Continental's revenue growth, healthy return on invested capital, and a narrow economic moat rating.