Automotive Division Will Benefit From Restructuring And Cost Savings

Key Takeaways

• Self-help measures and cost savings in the Automotive division are enhancing margins and earnings while supporting free cash flow and debt reduction.
  
• Restructuring and spin-off of the Automotive division aim to enhance profitability and investor appeal, driven by growth in braking systems demand.
  
• Declining automotive sales and macroeconomic pressures could limit revenue growth and profitability across Continental's divisions due to unfavorable market conditions and increased costs.

Catalysts

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

• The company has implemented self-help measures and cost savings in the Automotive division, projected to save €400 million in 2024, which can improve net margins and earnings.
  
• Sustainable pricing agreements and redesign to cost activities in the Automotive sector are expected to bolster revenue stability and improve margins moving into 2025.
  
• Inventory reduction strategies in the Automotive division have resulted in cash flow improvements, supporting further reduction efforts aimed at enhancing free cash flow and net indebtedness.
  
• The order intake in the braking systems, particularly in the MK C2 brake systems, indicates anticipated growth opportunities and potential revenue uplift due to increased demand from Asian players.
  
• The restructuring and spin-off of the Automotive division are expected to create a more focused and capital-market-ready company, potentially enhancing profitability and investor interest in the mid to long term.

Continental Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Continental's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 5.2% in 3 years time.
• Analysts expect earnings to reach €2.2 billion (and earnings per share of €10.99) by about April 2028, up from €1.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, down from 11.1x today. This future PE is lower than the current PE for the GB Auto Components industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 1.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.39%, as per the Simply Wall St company report.

Continental Future Earnings Per Share Growth

Risks

• The automotive sector faced declining sales in weak markets, particularly in Europe and North America, which could continue to pressure revenue growth.
  
• The automotive division's performance is challenged by unfavorable customer mix and delays in new product launches, which could impact earnings.
  
• The Tire business is experiencing increased raw material costs and uncertain volume growth, which may limit margin expansion.
  
• ContiTech is dealing with weak end markets, particularly in auto and industry sectors, driving down profitability despite cost-saving measures.
  
• Potential macroeconomic influences, such as tariffs and challenging global markets, could impact revenues and result in increased operational costs.

Valuation

• The analysts have a consensus price target of €77.722 for Continental based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €93.0, and the most bearish reporting a price target of just €59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €42.5 billion, earnings will come to €2.2 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 6.4%.
• Given the current share price of €65.02, the analyst price target of €77.72 is 16.3% 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.