Continental AG (CON), Europe’s second- largest maker of auto parts, stuck with its 2013 forecasts even as the region’s auto market declines in the first quarter more than industry executives had anticipated.
The manufacturer today reiterated targets to increase sales this year 5 percent and post adjusted earnings before interest and taxes above 10 percent of revenue. The shares rose as much as 5 percent to their highest in more than five years.
Continental, also the region’s second-largest tiremaker, has partly avoided the effects of Europe’s recession by following Volkswagen AG (VOW), Bayerische Motoren Werke AG and Daimler AG (DAI) into growing markets such as China and the U.S. A focus on high-value parts such as fuel-injection technology, safety sensors and emergency braking systems has also won high-end customers willing to pay more for the products.
“Continental offers products in the areas of safety and emission reduction, which are exactly the areas carmakers need to invest in as they are compelled by regulations,” said Sascha Gommel, a Frankfurt-based Commerzbank AG analyst. “There’s practically an oligopoly in electronic braking systems, for example, as there are only a few suppliers in this high margin business.”
The shares surged as much as 4.72 euros to 98.61 euros, their highest level since Nov. 9, 2007, and were up 3.8 percent as of 12:22 p.m. in Frankfurt trading. The stock has increased 11 percent this year, valuing the Hanover, Germany-based company at 19.5 billion euros ($25.4 billion).
Continental is looking for acquisitions, with a focus on opportunities outside Europe to expand the non-automotive segment of the company’s business, Chief Executive Officer Elmar Degenhart told reporters today in Frankfurt. Purchases could be in the range of about 1 billion euros, he said.
Automakers said this week at the Geneva auto show that European demand in January and February dropped more than they first anticipated, with the market set to decline across the region for a sixth straight year. Sales in January plunged to the lowest level on record for that month, according to industry group ACEA.
Continental forecast first-quarter revenue will decline 1 percent to 3 percent as auto production drops 12 percent in Europe. The slowdown has led the manufacturer to cut production temporarily for a limited number of employees at four German sites, the CEO said.
“This year, the downturn in the first quarter cannot be offset by growth in other regions,” he said. “For the remainder of the year, we expect a pick up in consolidated sales, particularly in the latter half of 2013.”
Full-year adjusted earnings before interest and taxes increased 16 percent to 3.52 billion euros, with the fourth- quarter figure rising 5.9 percent to 861 million euros, the company said. Sales in 2012 rose 7.3 percent to 32.7 billion euros, Continental reported key preliminary earnings for 2012 on Jan. 14.
Continental proposed a record dividend for 2012 of 2.25 euros per share, up from 1.50 euros a year earlier. This equals a payout ratio relative to the net income attributable to the shareholders of 24 percent, Degenhart said.
The manufacturer is still working on reducing debt stemming from 13.5 billion-euro loan for the 2007 purchase of Siemens AG (SIE)’s VDO car-electronics unit. Net debt declined almost 1.5 billion euros to 5.3 billion euros at the end of 2012, with the German company aiming to decrease debt further this year.
Continental refinanced debt in January through a syndicated-loan agreement with about 30 German and international banks. The new loan totals 4.5 billion euros and replaced a loan that was due to mature in April 2014.
Continental may start in July to repurchase one or more of the bonds maturing in 2015 or later, Chief Financial Officer Wolfgang Schaefer said. The decision depends on the costs and interest structure at the time. Continental has 750 million euros in bonds maturing in 2015 and 625 million euros in 2016.
Continental had no significant currency impact between the U.S. dollar and the euro last year as the company is naturally hedged, Schaefer said at the press conference. Continental’s purchases in dollars, such as raw materials and electronic parts, are more or less equal to sales earned in the currency. The burden from buying electronic parts in yen has eased this year compared to last, the CFO said.
The company’s biggest shareholder is family-owned industrial-bearing maker Schaeffler AG, with a 49.9 percent stake resulting from a failed hostile takeover in 2008.
“We are working very constructively and successful with Schaeffler,” Degenhart said today. Continental and Herzogenaurach, Germany-based Schaeffler cooperate on about 30 projects, he said. “We treasure the benefits of having a major shareholder that pursues strategic interests.”
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