Electrification And Automation Will Unlock High Tech Potential

Key Takeaways

• Aggressive cost reductions and operational streamlining in Automotive are set to drive significant long-term earnings growth and higher-than-expected margin expansion.
  
• Strong positioning in automation, digital technology, and Asian markets will accelerate high-margin revenue growth and shift Continental's earnings toward recurring, resilient streams.
  
• Electric vehicle shift, cost pressures, and regulatory demands threaten long-term sales, profit margins, and market share while ongoing restructuring strains investment in future technologies.

Catalysts

A technology company, provides solutions for vehicles, machines, traffic, and transportation worldwide.

• Analyst consensus expects €400 million in cost savings from self-help measures in Automotive, but this likely understates the margin uplift: with headcount reductions already approaching 12,000 and additional SG&A and R&D cuts underway, operational leverage from a much leaner cost base could push Automotive division net margins beyond even the top of current guidance, providing a material long-term boost to group earnings.
  
• While analysts broadly agree that sustainable pricing and redesign-to-cost initiatives will stabilize revenue and improve margins, they may be underestimating Continental's ongoing ability to exert pricing power: multiple new multi-year contracts-especially in high-value, next-generation systems like radar and integrated brakes-point to continuing above-market pricing and mix, supporting higher-than-expected revenue resilience and incremental margin expansion through at least 2026.
  
• Continental is exceptionally well-positioned to capitalize on the secular shift toward automation and electrification: with the autonomous mobility division securing a €1.2 billion radar contract and achieving order intake growth of over €1.5 billion year-on-year, the ramp in advanced driver assistance and EV component revenue will structurally lift the group's top line and shift earnings toward higher-margin technology categories.
  
• The strategic execution in China and emerging Asian markets is accelerating, with increasing contract wins from local OEMs in both sensors and braking; these wins give Continental a platform for outsized growth and market share gains that will drive sustained sales expansion and outsized profit contributions as these markets shift rapidly to high-tech solutions.
  
• Continental's accelerating investments in digital/connected vehicle platforms create a high-potential pathway to recurring revenue streams through software, cyber security, and over-the-air services, transforming revenue mix and driving higher group multiples as investors recognize the embedded growth and scalability of these segments.

Continental Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Continental compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Continental's revenue will grow by 2.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.9% today to 5.9% in 3 years time.
• The bullish analysts expect earnings to reach €2.5 billion (and earnings per share of €12.52) by about July 2028, up from €1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 13.1x today. This future PE is lower than the current PE for the GB Auto Components industry at 12.8x.
• Analysts expect the number of shares outstanding to decline by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.32%, as per the Simply Wall St company report.

Continental Future Earnings Per Share Growth

Risks

• The acceleration of electric vehicle adoption may challenge Continental's legacy business, as management acknowledges current market volatility and a weaker global auto production outlook; this could result in long-term pressure on internal combustion engine component revenues and thus affect overall sales growth and revenue streams.
  
• Persistent supply chain disruption, global inflation, and volatility in raw material and energy costs continue to weigh on margins, with management expecting ongoing raw material cost headwinds throughout the year and limited visibility into when these pressures will ease, which could have a sustained negative impact on net margins and overall profitability.
  
• Increased regulation and evolving sustainability mandates could drive higher R&D and compliance costs, and while cost-cutting programs (including significant headcount reduction) are in progress, these may only provide temporary margin relief and could limit Continental's ability to invest adequately in future technologies, thereby constraining long-term net margin and return on invested capital.
  
• Management concedes that order intake growth in advanced driver assistance and autonomous systems remains uneven, with potential for capital-intensive transitions and the risk of losing market share to more agile competitors, especially as OEMs ramp up their own vertical integration and technology firms enter critical product segments; this could threaten Continental's medium-term revenue and market share growth.
  
• Continental's substantial exposure to cyclical global auto production and shifting regional demand (with ongoing declines in original equipment tire volumes and uncertainty in markets like China and North America) amplifies revenue and earnings volatility, and the recurring need for restructuring and one-off charges could suppress both net margins and reported earnings for multiple years.

Valuation

• The assumed bullish price target for Continental is €100.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Continental's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €100.0, and the most bearish reporting a price target of just €64.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €42.3 billion, earnings will come to €2.5 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 6.3%.
• Given the current share price of €76.08, the bullish analyst price target of €100.0 is 23.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.