Continental AG: A Post-Spinoff Re-Rating Play Amid Tariff Turbulence

The automotive and tire giant Continental AG (ETR: CON) is undergoing a seismic shift. By spinning off its loss-prone Automotive division into a new entity, Aumovio, by year-end 2025, the company is betting on a cleaner balance sheet and a refocused strategy to unlock shareholder value. But with U.S. tariffs reshaping its business landscape, investors must assess whether this restructuring—coupled with a pivot to its profitable Tire division—can finally deliver a sustained valuation re-rating.

The Spinoff: A Necessary Breakup

Continental's decision to split into Aumovio (focusing on software-defined vehicles, sensors, and autonomous driving) and a standalone Tire/ContiTech entity is a bold move. The new Aumovio, led by CEO Philipp von Hirschheydt, will operate independently, with €1.5 billion in pre-spinoff cash and a Frankfurt Stock Exchange listing. This separation aims to free Continental from the volatility of the automotive sector, where headwinds like rising U.S. tariffs on auto parts and shifting demand toward EVs have pressured margins.

The Tire division, which contributed nearly half of Continental's €41.4 billion in 2023 sales, is now the crown jewel. With an adjusted EBIT margin of 13.7% in 2024, it's far healthier than ContiTech's 6.2% margin. Post-restructuring, Continental's core focus on premium tires—bolstered by strong winter tire demand in Europe and industrial growth in North America—could stabilize earnings.

Tariffs: A Double-Edged Sword

The U.S. tariff environment has been a relentless thorn. Since early 2025, 25% duties on non-USMCA-compliant auto parts and 10% “reciprocal” tariffs have squeezed non-Tire divisions. ContiTech, which relies on Mexican imports for over half its supplies, faces margin pressure as it scrambles to ensure compliance with trade agreements. Meanwhile, the Tire division's exposure is muted: only 10% of imports come from Mexico, with most sourced from Europe.

Continental's mitigation tactics—supply chain re-routes, customer cost-sharing agreements, and ContiTech's planned sale by 2026—suggest management is laser-focused on shielding profitability. However, the North American vehicle production slump (expected to drop 8–10% in 2025) adds uncertainty.

Financials: A Divided Picture

• Tires: Sales held steady at €13.9 billion in 2024, with margins up slightly. The division's 2025 outlook—replacement tire demand flat to +2% in key markets—aligns with modest growth.
• ContiTech: Sales fell 6.7% to €6.4 billion in 2024, though a major conveyor belt order from the U.S. hints at pockets of resilience. Still, its pending sale post-2026 spinoff suggests it's no longer core to Continental's future.
• Automotive: While Aumovio's tech focus (e.g., autonomous driving software) is promising, its independence means Continental no longer shoulders its risks.

The parent company's 2025 guidance—€38.0–41.0 billion in sales and a 6.5–7.5% EBIT margin—depends heavily on executing its split and ContiTech's exit.

Investment Considerations: Risks vs. Reward

Bull Case:
- Aumovio's spinoff removes drag on Continental's valuation.
- Tires' stable margins and industrial demand (e.g., mining/construction) could attract sector investors.
- ContiTech's sale could unlock hidden value, boosting net income.
- The proposed €2.50 dividend per share (+14% from 2024) signals confidence in cash flow.

Bear Case:
- Tariffs could escalate further if U.S.-Europe trade tensions worsen.
- Aumovio's success hinges on unproven software-driven revenue models.
- Continental's German job cuts (over 10,000) and restructuring costs may weigh on short-term earnings.

Verdict: A Slow-Burn Re-Rating Play

Continental's shares have lagged peers amid restructuring noise and tariff fears. However, the separation of non-core assets could finally allow the market to value its Tire division at a premium. If Aumovio's listing succeeds and ContiTech exits smoothly, Continental's focus on tires—backed by a 13.7% EBIT margin—could justify a P/E expansion.

Investors should monitor execution risks, including tariff compliance and Aumovio's IPO reception. For now, Continental's stock—trading at a 10x forward P/E versus peers' 12–14x—offers a margin of safety. The spinoff could be the catalyst to close that gap.

Investment Advice:
- Hold for the long term, with a focus on the Tire division's stability.
- Avoid if U.S.-EU trade tensions escalate or ContiTech's sale falters.
- Watch Aumovio's tech partnerships and the parent's 2026 ContiTech exit timeline.

The verdict? Continental's restructuring is a necessary gamble. If it succeeds, investors may finally see the valuation re-rating they've waited years for.

Data as of June 6, 2025. Past performance does not guarantee future results.