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Continental - CON

Introduction: Continental AG is a German-based holding company and automotive industry supplier. It operates through two business groups: the Automotive Group and the Rubber Group.

The Automotive Group is divided into the Chassis & Safety division, the Powertrain division and the Interior division. The Chassis & Safety division focuses on areas such as networked driving safety, brakes, driver assistance, chassis, active and passive safety and sensor technology for the avoidance of accidents and injury. The Powertrain division is responsible for powertrain system solutions. The Interior division focuses on information, communication and networking solutions, their presentation and operability in vehicles.

The Rubber Group is divided into the Tire and ContiTech divisions. The Tire division comprises passenger and light truck tires, including tires for motorcycles, and commercial vehicle tires. The ContiTech division develops and manufactures functional parts, components and systems for the automotive industry.

More recently Continental has announced it will acquire the US rubber and plastics company, Veyance, with the aim of reinforcing its non-car business. The EV of Veyance is estimated to be EUR 1.4 billion. Veyance will be acquired with the support of the Carlyle Group (Venture Capital Group). The full integration of Veyance will complement the ContiTech division and finally allow Continental to expand in the rubber and plastic segments, as well as in areas such as fluid technology and conveyor belts.

Furthermore with this acquisition, Continental will reinforce its non-Original Equipment (non-OEM) sales. It is targeting a contribution from this unit of 40% (up from 29% in 2013) to the overall sales.

Veyance’s performance of ca. €1.5bn sales and EBITDA of €204m (13.6%), is presently quite good and should not negatively impact ContiTech results (EBITDA of €576bn for sales of €3.9bn, with margins at 14.8%). Moreover, the consolidated group’s sales (Veyance sales: US 53% and 31% in EMA) are complementary to each other as ContiTech’ sales occur mostly in Europe, i.e. 66%.

Veyance’s EV reflects an EBITDA multiple of 7.3x and 0.96 ratio to sales; these figures are in line with Continental’s previously achieved ratios and should therefore lead to the implementation of a cost cutting strategy based on the exploitation of synergies. Given this, and Continental’s strong position in Europe, CON’s full year results could be revised upwards by the major analysts.

Strengths and weaknesses analysis / Fundamental analysis:
Strengths:

• Continental benefits from strong brand recognition,
• Its business is well diversified (on a geographical basis and in terms of product ranges),
• The company targets all price segments with a full range from lower priced to premium products,
• The acquisition of Veyance adds above average turnover potential,
• The acquisition of Veyance allows the creation of synergies, hence the profitability of the  merged group should increase,
• Higher mobility ratios in emerging regions offer the company a good long-term opportunity. 

• Continental’s business is highly dependent on consumer cycles,
• The worldwide tire market is controlled by a few companies; a price war could hit Continental’s margin expectations,
• Higher raw material prices would accelerate margin erosion,
• The company’s core market (USA and Europe) is exposed to lower growth rates for the years to come.

Company profile, investment opportunity and asset management integration: 

Price ranges: