Investors have been tapping the brakes on German tire maker Continental’s shares lately, leading a bunch of bulls to say the stock may be a smart buy.
A mid-April profit warning tied to the strengthening euro has put pressure on the stock. Gains for the currency, which is up about 9% against the dollar over the past 12 months, tend to cut into overseas revenue generated by multinationals such as Continental AG
CON, -0.22%
.
In that warning last month, the company’s management said “exchange rate and inventory valuation effects” would hit first-half earnings — as well as cut into profit margins. But strategists at Germany’s DZ Bank have remained upbeat, recently adding the stock to their “equity long ideas” list.
“The negative share-price reaction after Continental’s outlook adjustment seems overdone to us,” the bank’s team wrote in a note. “The margin adjustment is triggered by two one-time effects and will have no negative impact for mid- to long-term margin development.”
See: Continental’s profit falls after currency hit
It’s possible that the euro’s recent rally is over. That would give a lift to Continental, which generates about 20% of its revenue in the U.S., while China, Japan, and the United Kingdom each contribute 4% to 5%.
After wallowing under $1.05 in early 2017, the euro
EURUSD, -0.0587%
rose above $1.25 in February, but it’s lately fallen back to around $1.20. Bank of America Merrill Lynch strategist David Woo recommended selling the euro in a recent note, citing factors such as weakening eurozone economic data.
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While Continental is best-known for its tires, the company also ranks as a big player in powertrain manufacturing, brake systems, car-interior electronics, and other auto components. DZ Bank sees sturdy growth ahead overall: “We expect an increasing demand for driver-assistance systems, as well as for components for electrified drivetrains. In our view, Continental should benefit from such a development, besides a solid demand for cars worldwide.”
Continental’s valuation doesn’t look that rich. Its shares trade at a bit more than 13 times estimated forward-year earnings, below the Stoxx Europe 600’s
SXXP, +0.08%
multiple of 15. The stock is up about 1% this year, stretching its advance over the past 12 months to 10%.
Another part of the bull case is a much-anticipated reorganization that could bring spinoffs. “The share price over the coming quarters is likely to be driven by any comments regarding a potential split into several entities,” wrote UBS analysts in a recent report, noting that they “do not expect Conti to say much regarding a potential separation into several entities before this summer.”
The UBS team’s sum-of-parts valuation, or breakup-value analysis, suggests Continental’s stock could be worth as much as €260 ($312), or 14% above its recent print around €228. The Swiss bank’s analysts have a buy rating on shares, along with a price target of €253, implying a rally of 11%.
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The Hanover-based company first acknowledged in January that it was considering a revamp. “We are in the early stages of analyzing how our organization can become even more flexible in response to the fast-changing environment in the automotive industry,” Continental officials said at that time.
The stock surged north of €257 in January thanks to the breakup chatter, before pulling back. Continental soon might take a trip back to that area, if investors like how its reorg effort turns out — and if the euro becomes less of a drag.
This is an updated version of a report that also appears at Barrons.com.
Source : MTV
