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Investing.com -- Continental AG (ETR:CONG) faces a challenging start to 2025, with weak automotive demand and ongoing restructuring weighing on performance, while the tire segment offers some resilience amid tariff uncertainties.
Shares of the German automotive parts manufacturer were down 2% at 07:48 ET (11:48 GMT).
HSBC analysts have flagged concerns over Continental AG’s performance in early 2025, citing declining car production and potential tariff risks as key pressures on the company’s outlook.
While a turnaround may be approaching, challenges in the automotive segment remain a significant uncertainty ahead of the planned spin-off of the Auto division.
The automotive segment has had a weak start to the year, with HSBC estimating an adjusted EBIT margin of just 0.3% in the first quarter of 2025.
Revenue is projected to decline by 2.6% year-on-year, compared to a 4.2% drop in global car production when adjusted for Continental’s geographic exposure.
A major factor behind the underperformance is China, where European car manufacturers—key customers for Continental—are losing market share.
HSBC analysts do not expect Continental to secure substantial business with Chinese domestic automakers in 2025 or 2026.
Cost-cutting measures are ongoing and showing increasing benefits, and with car production anticipated to improve through the year, the automotive segment is expected to achieve a 3.2% margin for the full year, compared to the company’s guidance range of 2.5% to 4%.
Continental’s margin forecast does not assume any changes to tariffs relative to 2024.
During a recent pre-close call, Continental reiterated expectations of a break-even adjusted EBIT for the first quarter, supported by improved pricing and fixed cost reductions.
However, restructuring provisions in the low triple-digit million-euro range will weigh on the segment’s cash contribution in the quarter.
The tire segment has shown resilience, with HSBC and Stifel both projecting stable to slightly positive volume growth year-on-year. Price and mix improvements of around 3% are expected to support profitability.
First-quarter margins are likely to be at the lower end of the company’s full-year guidance of 13.3% to 14.3%, though Continental is expected to achieve a 14% margin for 2025, helped by improvements in the truck tire market in the second half of the year.
Stifel analysts noted that the adjusted EBIT margin for the segment is projected at around 13.5%, implying a 5% upside versus VisibleAlpha consensus.
ContiTech, Continental’s industrial and rubber products division, continues to struggle with weak end markets.
HSBC expects a 3% year-on-year decline in first-quarter sales, with margins stabilizing at around 5.2%. For the full year, ContiTech’s margin is projected at 6.3%, within the company’s guidance range of 6% to 7% but still at subdued levels.
Stifel analysts emphasized continued weakness in light vehicle production and muted industrial demand.
Revenue in the first half of 2025 is expected to trend at similar levels to the second half of 2024, with estimated first-quarter revenue at €1,544 million, approximately 10% below consensus.
Adjusted EBIT for ContiTech is projected at €81 million, 19.4% below consensus, though efficiency measures are expected to keep margins broadly flat year-on-year.
Operational earnings improvements are largely being offset by restructuring cash outflows and spin-off preparations, leading to a projected free cash flow of between -€550 million and -€450 million for the first quarter.
Continental imports approximately €1.4 billion worth of goods from Mexico into the US, with around two-thirds related to the Automotive division, 20% to ContiTech, and 10% to Tires. Automotive-related imports into the US account for about €1.9 billion in total revenue.
HSBC has revised its earnings estimates downward, cutting reported 2025-2026 EPS forecasts by 15-20% due to higher restructuring and carve-out costs. Adjusted EPS estimates, which exclude exceptional items, have been lowered by a smaller margin of 1-5%. The brokerage has also introduced its 2027 earnings estimates.
Continental’s target price has been reduced slightly from €70 to €69, reflecting the modest downward adjustments in forecasts.
The planned spin-off of the Auto division remains on track for the second half of 2025, with a Capital Markets Day scheduled for June 24-25 serving as the next major event for investors.
HSBC continues to apply a 15% holding discount to its sum-of-the-parts valuation, maintaining a Hold rating on the stock.
The target price implies a potential upside of around 6%, but near-term challenges in the automotive sector—particularly weak car production and an unfavorable customer mix—are expected to weigh on performance.