Continental Earnings: Solid Revenue Growth but Mixed Margin Result, Guidance Slightly Lowered

Narrow-moat-rated Continental CON 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.

Adjusted EBIT was EUR 497 million for a 4.8% margin, up from EUR 411 million and a 4.3% margin last year as favorable operating leverage was partially offset by inflationary cost pressures, logistics disruption, and negative currency effect. Inflation was a EUR 360 million headwind in the quarter, and Continental tags a EUR 1.4 billion 2023 headwind. Free cash flow was a burn of EUR 14 million versus negative EUR 687 million last year on improved working capital, partly offset by higher capital spending.

Management slightly lowered 2023 guidance with revenue at EUR 41.5 billion-EUR 44.5 billion, down from EUR 42 billion-EUR 45 billion due to tire dealer destocking. Adjusted EBIT margin guidance remains 5.5%-6.5%. We reduced our 2023 revenue estimate to EUR 43.0 billion from EUR 43.5 billion. Our 2023 assumptions reflect the midpoint of revenue guidance and the low end of margin due to risks we see from 2023 industry headwinds. Due to the time value of money, partly offset by model changes, we raised our fair value estimate to EUR 162 from EUR 159. Shares of 5-star Continental currently trade at a compelling 57% discount to our new fair value.