Continental Stock Feels The Burn On Rubber Price Inflation

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AG  (CTTAY) shares fell Thursday after the first-half performance of its ContiTech division and stagnating margins in its automotive business left investors disappointed.

The world’s second largest maker of car parts reported sales of €22.2 billion ($25.4 billion) for the six months to 30, up 10% on the same period one year ago, before raising its full-year revenue forecast by just more than 1% to €44 billion.

However, the bottom line and group margin contracted slightly after the company was hit by higher raw materials prices in its tires division, the largest unit of the group. 

Continental shares slid close to 0.50% during early trading in Frankfurt to change hands at a high of €193.25, reducing their year to date gain to 2.7%, amid a mixed market for European auto stocks. 

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“While we expect mild upgrades to current FY revenue consensus of €43.7bn, we see limited change to FY Adj.EBIT expectations of ~€5bn as better revenues are likely to be offset on weaker margin expansion at Autos and risks to FY profits,” said Ashik Kurian, an analyst at Jefferies. 

Continental shares have gained a low single digit number in the last year and are also broadly unchanged from their January 2015 level. It is investing heavily in making itself an integral part of the electric vehicle supply chain, after already having gained a dominant position in the provision of parts for hybrid cars, but it is also facing pressure from the slow death of diesel cars.

The company is heavily exposed to the diesel car industry, which was once hailed as a low emission alternative to petrol but has since been shown to just as pollutive, if not more so. 

“German diesel share has held steady at c48% of new car sales for the past four years, but in Q3 2016 it fell below 46% for the first time in five years. However, the move away from diesel has been the sharpest in ,” said Fei Teng, an analyst at Berenberg, in a recent note. 

Local governments in and have both put the idea of dieasel specific emissions taxes on the table while sales of diesel vehicles have already begun to trail off in Europe, which could pose an existential risk to parts of Continental’s business. Powertrain is its largest division, accounting for around 18% of annual sales.

“Divestments of unfavourable parts of the business may be more welcome, particularly in the context of accelerating diesel market share declines in Europe this year, although this may be harder to achieve,” said Teng.

Continental said in April that it would seek to reduce Powertrain’s exposure to diesel in favor of electric vehicles, following a strategic review of the business.

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