Here’s why Continental AG stock now offers a good entry opportunity

Continental (WKN:543900) shares put in an impressive performance through the beginning of 2015. Since then, investors have had little joy with it, with the share price falling more than 25% from its peak, although the outlook has been raised in the meantime. The optimism before the presentation of the half-yearly report was modest and also afterwards followed rather disillusionment. At the same time, there are exciting developments at second glance. Here's what you need to know about Conti right now.

This is the situation with the individual segments

When it comes to soccer sponsorship, as was recently the case at the European Championship in France, Continental prefers to rely on its tire division. This business remains the main sales driver, accounting for more than half of the Group's operating profit of. Euro in the first half of the year. ContiTech, the industrial division that is also part of the Rubber Group, also delivers encouraging year-on-year figures.

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The Powertrain division, on the other hand, is treading water. The Hybrid Electric Vehicle division, which is particularly important for its future, is characterized by regular management changes: in 2012, the Spaniard Xavier Pujol took over, who in 2014 was temporarily replaced by division head Jose Avila and then by Bernd Mahr. Rudolf Stark, the former head of the Transmission division, is now taking over the business.

The job cuts at the important Gifhorn site that became necessary last year are evidence of overly optimistic forecasts by former management. The task of Rudolf Stark will now be to set up the division correctly in order to be able to cut a large piece of the electric drive pie in the future.

This is not getting any easier since Siemens' (WKN:723610) more aggressive entry into the market alongside Valeo (WKN:854052). Although we can now assume that the market will soon develop very quickly, this will of course be at the expense of injection systems and exhaust aftertreatment technologies.

The latter are apparently already deliberately defensively managed to avoid an abrupt slump. According to the figures now published, the sales volumes of traditional products have fallen significantly.

The Interior division, which is struggling with declining profitability, was also not entirely convincing. Most recently, however, groundbreaking innovations like z. B. a gesture control presented, which make hope for improvement.

However, the current stars of the Automotive Group are the assistance systems, whose sales continue to grow rapidly at a rate of 45% year-on-year. The earnings of the Chassis & Safety division were correspondingly solid.

This is the state of finances

The market capitalization of 36.6 billion. Euro (close 03.08.) is now a good bit below the expected 2016 sales of about 41 billion., but still around 150 % above the book value. In this constellation, it is important that the Group continues to reliably generate good profit margins from the proceeds in the future – and this is precisely what I believe is to be expected.

As Continental distributes less than 30% of net income, the likelihood that the corporation will be able to pay continuously increasing dividends in the medium to long term is very high. After all, this is how equity and assets each increase by several billion euros a year. Since the profitability could even fall slightly, without the nominal profit would decline.

The dividend yield of 2.5% to 3.0% expected over the next few years does not initially seem exhilarating. But considering that executives could pay out 3 or even 4 times that at any time without going to the bottom line, we see the potential.

The financial strength is also reflected in excellent financing conditions. In May, the framework program for the flexible placement of medium- and long-term bonds in the capital market of up to 7.5 billion. Euro updated, which on the one hand can be used to pay off higher-interest loans.

On the other hand, I assume that the Hanoverians are lying in wait to strengthen once again with a major purchase. I would like to see ContiTech's technology portfolio strengthened to give the Group a broader foundation and to transfer innovations from the automotive sector more intensively to other areas of application.

Conclusion

The drop in the share price was quite understandable in view of the challenges Continental is facing. The Group has its hands full trying to transition the Powertrain division as smoothly as possible into the age of electromobility and stabilize the profitability of the IT-intensive Interior division.

The rock of the traditional tire business remains, while driver assistance systems and other innovations provide growth fantasy. In addition, another major acquisition is likely to be made soon to give the business additional momentum.

Now at this reduced level, it's a good opportunity for investors to add a reliable dividend payer with continued growth and decent profitability to their portfolios, even if triple-digit price gains like in the past are no longer expected over the coming years.

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Ralf Anders does not hold any securities of named companies. The Motley Fool does not own any of the stocks mentioned in the text.

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