Morningstar | Continental Reports Soft 2018, Guides to 2019 Margin Contraction; EUR 153 FVE Unchanged
Narrow-moat-rated Continental announced full-year diluted earnings per share before special items, or EPS, of EUR 15.11, EUR 0.43 better than the EUR 14.68 consensus EPS but representing a EUR 0.42 per share drop compared with the prior year’s reported EUR 15.53 EPS. Full-year 2018 revenue increased 0.9% to EUR 44.4 billion but excluding negative currency translation, revenue would have increased nicely by 3.1%.At EUR 4.118 billion, consolidated adjusted EBIT plummeted 13% from EUR 4.749 billion as margin contraction hit nearly all segments. In addition to unfavorable operating leverage from Europe WLTP implementation and a weaker China market, margin was also impacted by weaker pricing environment for tires, a warranty provision in Powertrain, and slightly higher R&D spending on autonomy and electrification. As a percent of revenue, R&D was 7.2%, inching up 10-basis points over 2017. However, the level in the prior year was elevated too. During the past 10 years, median R&D as a percent of sales has been 6.2%. Consequently, consolidated adjusted EBIT margin was squeezed by 150-basis points to 9.3% compared with 10.8% last year. The 3-star-rated shares of Continental currently trade at an 8% discount to our unchanged EUR 153 fair value estimate.
We think 2019 guidance slightly disappointed the market, but we recognize the uncertainty in forecasting this year with a possibility of a no-deal Brexit and the current weakness in the Chinese light vehicle market. While revenue guidance, in a range of EUR 45 billion to EUR 47 billion, was in line with the sell-side consensus of EUR 46.0 billion, margin guidance was to the low side. The current sell-side consensus EBIT estimate of EUR 4.114 billion implies a margin of 9% versus management's guidance range of 8% to 9%. Guidance also represents continued contraction of 30 to 130 basis points compared with 2018's 9.3% adjusted EBIT result.
Continental is an automotive industry supplier. Co.'s automotive divisions comprised of: Chassis & Safety, which develops and produces systems that provide safety and enhanced vehicle dynamics; Powertrain, which develops solutions for gasoline and diesel engines, as well as hybrid and electrical drive systems; and Interior, which provides solutions for information management within vehicles and networking between vehicles. Co.'s rubber divisions comprised of: Tires, which provides tires for passenger cars through trucks, buses and construction site vehicles to special vehicles, motorcycles and bicycles; and ContiTech, which develops products made from rubber and plastic.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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