Continental Q4 an Improvement as Chip Crunch Lessens

Narrow-moat-rated Continental CON 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.

Fourth-quarter adjusted EBIT was EUR 497 million for a 4.8% margin, up from EUR 223 million and a 2.5% margin last year as the chip crunch continues, but with fewer customer production call-offs. Other headwinds remaining include the Ukraine war, China COVID-19 resurgence, as well as higher costs for wages, energy, and logistics. Due to higher profitability and improved working capital, partially offset by increased capital spending, free cash flow improved substantially, surging to EUR 1,550 million from EUR 336 million last year.

Despite headwinds, management’s new 2023 guidance shows significant increases in revenue and adjusted EBIT. 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 revenue guidance and the low end of margin due to risks we see from industry headwinds remaining in 2023.