Morningstar | Continental Reports Soft 3Q Results, Slight Reduction in Revenue Guidance; EUR 153 FVE Unchanged
Narrow-moat-rated Continental announced third-quarter earnings per share before special items, or EPS, of EUR 2.82, EUR 0.07 better than the EUR 2.75 consensus EPS but representing a EUR 1.02 per share drop compared with the prior year’s EUR 3.84 EPS. Revenue increased 0.9% to EUR 10.8 billion but excluding negative currency translation, revenue would have increased 2.1%.At EUR 769 million, consolidated adjusted EBIT plummeted 30% from EUR 1.105 billion as margin contraction hit all segments. In addition to unfavorable operating leverage on lower volume, margin was also impacted by EUR 100 million warranty provision in Powertrain, and much higher R&D spending on autonomy and electrification. As a percent of revenue, R&D was 10.1%, jumping 2.8 percentage points higher than the third quarter of 2017. Consequently, consolidated adjusted EBIT margin was squeezed by 320 basis points to 7.1% compared with 10.3% last year. The 3-star-rated shares of Continental currently trade at a 10% discount to our unchanged EUR 153 fair value estimate.
Guidance for 2018 includes higher raw material cost (negative EUR 100 million), spending on tire capacity expansion, costs associated with a greenfield tire facility in Thailand, and lower third-quarter European customer production on the new more complex emission certification process. Management confirmed operating guidance, maintaining an adjusted EBIT margin forecast at "greater than 9%" and capital expenditure of about 7% of sales. However, revenue is now expected to be around EUR 44.5 billion, down EUR 500 million on a more negative currency outlook.
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.
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