On Tuesday, Citi updated its outlook on Continental AG (ETR:CONG) shares, reducing the price target to €73.00 from the previous €85.00, while maintaining a Buy rating on the stock. The adjustment follows a reassessment of the company's financial forecasts, particularly within its automotive division.
The firm now anticipates Continental's fiscal year 2024 (FY24) group EBIT to reach approximately €2,533 million with margins around 6.2%, which is slightly below the company's own guidance of 6-7%. This revision represents a roughly 8% decrease from prior estimates.
The automotive division, in particular, has experienced a downward revision, with expected EBIT now at €482 million and margins at 2.4%, compared to the previous forecast of €643 million and 3.1% margins.
The rationale behind the lowered forecasts is twofold. Firstly, organic growth estimates have been scaled back due to reduced growth in light vehicle production (LVP) and diminished performance stemming from ongoing production volatility.
Secondly, there are slightly higher net inflation expectations, with the assumption that a significant portion of the previous year's inflation will be recovered and about half of this year's gross inflation could be mitigated.
Citi suggests that any indication of improved organic growth outperformance and confidence in the automotive margin's expansion, despite a stagnation in auto production, could act as key catalysts for an uplift in Continental AG's share price from its current levels.
In other recent news, Continental AG's earnings and revenue performance have been under significant scrutiny due to challenges within the automotive component supplier sector.
Bernstein SocGen Group initiated coverage on the company, assigning an underperform rating due to declining margins and industry-wide issues. In contrast, Citi has maintained a Buy rating for the company, setting a target of EUR87.
These recent developments also include a planned departure of the company's Chief Financial Officer (CFO) after her contract ends in December 2024. Despite the unanticipated exit, the impact on the company's revitalization efforts is expected to be minimal, with the CFO maintaining her position until a successor is chosen.
The company's margin expansion in auto-tech and turnaround strategy are primarily led by the auto-tech CEO, Philipp Von Hirschheydt, whose contract is valid until 2026.
CEO Nikolai has also recently extended his contract through 2029, ensuring stability in the management team during this crucial period. The search for a new CFO with automotive electronics expertise has begun, given the significance of auto margin recovery to Continental's financial performance.
InvestingPro Insights
In light of Citi's recent revision of Continental AG's financial forecasts, examining the company's current financial health through InvestingPro's real-time data offers additional clarity. The adjusted market cap of Continental AG stands at $11.39 billion, with an attractive price-to-earnings (P/E) ratio of 13.25, reflecting a potential for investment value. Moreover, the company's price-to-book ratio as of the last twelve months ending Q1 2024 is at 0.76, suggesting that the stock may be undervalued compared to its net asset value.
Despite a slight revenue growth of 1.15% in the last twelve months as of Q1 2024, Continental AG has faced a quarterly revenue decline of -5.03% in Q1 2024. This aligns with Citi's concerns about reduced growth in light vehicle production affecting the company's performance. However, the dividend yield as of the 184th day of 2024 stands at 2.71%, coupled with a notable dividend growth of 33.07% in the same period, indicating a commitment to returning value to shareholders.
An InvestingPro Tip suggests that investors consider the stock's PEG ratio of 0.06, which indicates that the stock may be significantly undervalued based on its earnings growth potential. Additionally, with the InvestingPro Fair Value estimated at $8.31, which exceeds the current price, there may be an upside potential for investors willing to take a position in Continental AG. For those interested in further analysis and tips, InvestingPro offers an additional 15 tips as part of its service. To explore these insights, use the coupon code uk10 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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