Continental Earnings: Despite Other Industry Headwinds, Results Improving as Chip Crunch Lessens

Narrow-moat-rated Continental CON 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.

First-quarter adjusted EBIT was EUR 578 million for a 5.6% margin, up from EUR 439 million and a 4.7% margin last year as the chip crunch continues but with fewer customer production call-offs. Other industry headwinds remaining include the Ukraine war and inflationary cost pressures (wages, materials, energy, and logistics) which Continental tags as a EUR 1.7 billion 2023 headwind. Free cash flow was a burn of EUR 949 million versus negative EUR 174 million last year on increased working capital and higher capital spending, partially offset by improved profitability.

Despite headwinds, management maintained 2023 guidance. Revenue is expected to be EUR 42 billion-EUR 45 billion, up 10% at the midpoint from EUR 39.4 billion in 2022. Adjusted EBIT margin guidance is 5.5%-6.5%, which, at the midpoint, represents a 34% increase from 2022′s EUR 1.9 billion adjusted EBIT. Our 2023 assumptions reflect the midpoint of management’s revenue guidance and the low end of margin due to risks we see from industry headwinds remaining in 2023.