Bernstein upgrades Continental on post-deal valuation discount to peers

Continental AG has been upgraded by Bernstein to "outperform" from "Market-Perform" and its price target has been raised to €82, marking the firm as the top pick in the tyre industry. This upgrade is due to a valuation discount Continental holds in comparison to its rivals after planned asset sales. The broker cited Continental's enterprise value to operating profit (EV/EBIT) ratio at 7.3 times, which is lower than Pirelli's 7.4 and Michelin's 8.0.

Although Continental trades at a 10% premium to Michelin based on Bloomberg data, Bernstein's calculations indicate a discount of approximately 10% after accounting for the €250 million MyCar disposal in Australia. The broker emphasized that headline valuations can sometimes be misleading in such scenarios. Bernstein anticipates the valuation gap to narrow within six months.

A significant part of the upside is attributed to the €4 billion sale of ContiTech to Lone Star Funds, slated for completion by the end of 2026. The market is believed to not fully grasp the impact of the sale price on the €3.1 billion in cash proceeds expected from the company. Roughly €400 million of ContiTech's €494 million cash balance at the end of the first half will remain with Continental, while around €100 million will stay inside ContiTech.

However, Bloomberg's net debt figures have not been updated as the sale has not concluded. Of the €3.1 billion expected from the sale, Bernstein predicts €2.5 billion will be returned to shareholders in 2027, alongside an ordinary dividend, resulting in a yield of about 20%, compared to around 7% for peers. The firm's recent pre-close briefing was reported as positive regarding third-quarter results, with Continental forecasting a tyre adjusted EBIT margin of 14.4% for the quarter, which is higher than the consensus estimate of 13.5%.

Bernstein believes this improvement is likely due to outdated analyst estimates. The company expects to reach the upper end of its 13.0% to 14.5% margin guidance for the third quarter.