As the US economy has worsened and the impact of the credit crunch spread to consumers in parts of Europe (particularly the UK), we revisited our assumptions for Continental, which is now 75% exposed to automotive manufacturing (rather than aftermarket) after the purchase of VDO from Siemens last year. Our expectation is that automotive production will fall sharply, causing revenues to fall short of market expectations, while the group also faces higher financial charges and lower earnings. This reduced fair value and we therefore sold the stock once our revised price target had been reached.
Continental is more than a tyre manufacturer; the largest contribution to earnings comes from automotive technology, such as ABS, traction control systems and the like. The share price came off on the back of disappointing earnings in the third quarter of 2005. This was caused by a combination of factors that look likely to be reversed, including high raw material prices, and the fact that Continental's management walked away from a putative bid by a private equity company. Management continues to cut costs, revenue growth looks set to continue (albeit at a lower rate than in recent years), and raw material prices should fall in the second half of 2007. These factors combine to produce a target price with 28% upside.
| Sedol |
Type |
Price |
Date |
| 4598589 |
Sell |
EUR 76.707 |
28/04/2008 |
| 4598589 |
Buy |
EUR 90.883 |
05/03/2007 |
| 4598589 |
Buy |
EUR 88.455 |
11/01/2007 |
|
