Legacy Engine Reliance And Rising Compliance Costs Will Erode Outlook

Key Takeaways

• Slow adaptation to electrification, regulatory burdens, and supply chain disruptions threaten revenue stability, margin resilience, and long-term operating performance.
  
• Competitive pressures, restructuring hurdles, and underperforming divisions raise risks around earnings quality, cash flow sustainability, and future shareholder returns.
  
• Margin gains from restructuring, strategic contracts, disciplined pricing, and supply chain localization position Continental for sustained profitability and long-term growth in advanced automotive technologies.

Catalysts

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

• The rapid shift toward electrification is expected to further erode demand for Continental's legacy internal combustion engine components, which still account for a substantial portion of revenues; as Continental struggles to accelerate its adaptation, long-term revenues remain exposed to structural decline that is unlikely to be fully offset by EV-related growth in the near to medium term.
  
• Increasing regulatory complexity and the global push for a circular economy are putting sustained upward pressure on compliance costs and capital expenditures, driving a long-term squeeze on net margins as Continental is forced to make significant ongoing investments into manufacturing upgrades and emissions compliance.
  
• Escalating geopolitical tensions and the proliferation of trade barriers-evidenced by new US and Chinese tariffs-are creating persistent supply chain volatility and input cost inflation, threatening Continental's ability to secure stable volumes, maintain price competitiveness, and protect operating profitably across key regions.
  
• Despite ongoing restructuring and cost-cutting efforts, the company remains encumbered by underperforming business segments, high upfront restructuring charges, and an uncertain turnaround in ContiTech and certain Automotive divisions, leaving earnings quality and sustainable free cash flow generation at risk if operational momentum stalls.
  
• The rapid pace of technology-driven disruption, combined with intensifying competition from tech-centric entrants and increased vertical integration among major OEMs, heightens the risk of product obsolescence and contract losses, jeopardizing long-term order visibility and leading to further margin compression and diminished shareholder returns.

Continental Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Continental compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Continental's revenue will decrease by 0.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.9% today to 5.2% in 3 years time.
• The bearish analysts expect earnings to reach €2.1 billion (and earnings per share of €10.51) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 7.4x 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

• Continental's strong self-help measures and operational restructuring have led to substantial margin improvement in Automotive, with an adjusted EBIT margin rising from about 2 percent to approximately 6 percent, and ongoing cost reduction programs are likely to sustain this margin uplift over time, supporting stronger earnings and profitability.
  
• The company's order intake for automotive technologies remains robust, with a notable €1.2 billion contract win in North America for advanced radar systems and additional wins in brake and suspension systems, indicating long-term revenue growth opportunities aligned with trends toward ADAS and autonomous mobility.
  
• Pricing discipline and successful implementation of sustainable price increases have materially improved Continental's margins, and management is focused on value creation through selective customer projects, which could bolster future net margins and protect profitability even in uncertain market conditions.
  
• Continental's global production and supply chain footprint, combined with significant USMCA compliance and ongoing efforts to localize supply chains, enhances resilience against global trade barriers, which is likely to maintain revenue stability and minimize adverse cost surprises over the long term.
  
• Accelerated investment in technology and efficiency initiatives, current headcount reductions, and manufacturing optimization (such as plant consolidation and segment exits) are lowering the cost base while positioning the company to better capitalize on trends like electrification, connectivity, and safety, providing a potential for continuous improvement in operating leverage and free cash flow.

Valuation

• The assumed bearish price target for Continental is €64.35, which represents two standard deviations below the consensus price target of €82.21. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be €39.6 billion, earnings will come to €2.1 billion, and it would be trading on a PE ratio of 7.4x, assuming you use a discount rate of 6.3%.
• Given the current share price of €76.08, the bearish analyst price target of €64.35 is 18.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.