Analysts upgrade Conti despite OEM shutdowns

Financial analysts have upgraded Continental AG shares to buy on the basis that car manufacturer shutdowns will only be a limited measure. Writing in an investors note dated 25 March, Jefferies analysts explained their rationale:

“suppliers stocks are all down in the ballpark of 50 per cent with limited differentiation over the last three months… we expect that the Covid-19-related production stop in Europe and North America will disappear over the course of the next few months and that we will return to a normalized level of production in the second half of 2020.”

And of course Continental is well-known for its high level of connection with the original equipment (OE) business, with perhaps as much as 30 per cent market share in the car tyre OE sector. However, the analysts suggested that structural support in the recovery from the Covid crisis will also help: “Additionally, highly supportive central banks and governments should bode well for car demand once the lock-down ends.”

That said, Jefferies acknowledge the unfortunate coincidence that Continental’s tyre business experienced the drop in demand at the the same time as it increased capacity in North America and Thailand: “Lower capacity utilization in existing plants and the ramp up of the new plants have been weighing on margins. However, this is not a structural issue but rather a cyclical. We argue that Conti is still having the best cost base among tyre manufacturers and a recovery in volumes (especially in Europe) will lift pre-tax profit margins (EBIT) back to greater than 15 per cent”.

However, there is no doubt that the current shutdown will affect economic performance: “…the current drop in business will leave its mark on balance sheets. This creates strategic and market share opportunities for companies with strong balance sheets, in our view.”