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Holly LaFon
Holly LaFon
Articles (9009)  | Author's Website |

David Herro Comments on Continental

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October 09, 2018 | About:

Continental (XTER:CON)’s stock price has fallen due to industry-wide concerns about auto production volumes and tariffs, but we believe the company has superior end-market exposures and a lower risk profile than many of its peers. Continental’s tire business accounts for about 45% of the company’s earnings, and we find that it generates solid margins and returns relative to industry peers. Replacement tires account for a large portion of segment earnings and provide a meaningful source of stable growth, which gives the company an advantage over auto supplier peers, especially in an economic downturn scenario. The company recently optimized its footprint of large, modern factories in low-cost countries. This strategy benefits Continental, compared to other global tire manufacturers that are burdened with onerous legacy cost structures in smaller, less-automated plants, which are difficult and costly to shutter. The company also has leading market share in concentrated segments of the automotive components business, where it derives a good amount of revenue from high value-added components. We expect increasing trends for vehicle electrification and autonomous driving will provide significant, ongoing growth in this part of Continental’s business. In addition, we think management has done a good job improving the company by taking action to deleverage the business, enhance profitability and drive organic growth.

From David Herro (Trades, Portfolio)'s third quarter 2018 Oakmark Global Fund commentary.

About the author:

Holly LaFon
I'm a financial journalist with a master of science in journalism from Medill at Northwestern University.

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