Continental AG's Q1 Surge: Why BofA Stands by a Buy Rating Despite Headwinds

Continental AG (ETR: CONTN) delivered a robust Q1 2025 performance, outperforming expectations and reinforcing its strategic pivot toward operational efficiency and sector specialization. Bank of America Global Research maintained its Buy rating on the automotive supplier, citing a 217.9% year-on-year jump in adjusted EBIT to €639 million and a solid trajectory toward its 2025 financial targets. Here’s why investors should take note.

Financial Highlights: A Turnaround in Motion

Despite a slight dip in consolidated sales to €9.7 billion (-0.8% YoY), Continental’s adjusted EBIT margin expanded to 6.6%—a dramatic improvement from 2.1% in Q1 2024. Excluding the impact of IFRS 5 accounting (due to its planned Automotive division spin-off), the adjusted EBIT would still have risen to €586 million, underscoring operational resilience. Net income turned positive to €68 million, reversing a €53 million loss a year earlier, while adjusted free cash flow improved to -€304 million, a stark contrast to -€1.1 billion in Q1 2024.

Strategic Restructuring: Spin-Off as a Catalyst

The planned spin-off of its Automotive division by September 2025 is central to Continental’s turnaround. This restructuring, driven by IFRS 5 accounting rules, has already redefined its financial reporting:
- Continuing operations (Tires and ContiTech) now form the core, with 2025 sales targets of €19.5–21.0 billion and a 10.5–11.5% adjusted EBIT margin.
- Discontinued operations (Automotive) aim for €18.0–20.0 billion in sales, though margins remain modest (2.5–4.0%) due to industry-wide cost pressures.

The spin-off isolates Automotive’s volatility, enabling focus on high-margin sectors like Tires, which saw a 3.7% sales rise to €3.4 billion and a 13.4% margin.

Sector-Specific Strengths

1. Tires: A Growth Engine
2. The division’s 13.4% adjusted EBIT margin (vs. 11.7% in Q1 2024) reflects strong demand in the replacement-tire market.

3. Sustainability wins, like the UltraContact NXT earning top ratings for eco-performance, bolster brand equity.

4. ContiTech: Navigating Challenges

5. Despite a 6.7% sales drop to €1.5 billion due to weak European industrial demand, ContiTech maintained a 5.4% margin.

6. A €3 million hydrogen hose production line in Germany signals a push into clean energy infrastructure, aligning with global decarbonization goals.

7. Automotive: Progress Amid Headwinds

8. The division’s adjusted EBIT margin improved to 2.8% (vs. -4.0% in Q1 2024) through cost discipline and a €5.8 billion order intake, including radar sensor contracts.

BofA’s Bullish Case: Risks vs. Opportunities

Bank of America highlights three pillars supporting its Buy rating:
1. Cost Optimization: Savings from restructuring and price adjustments are driving margin expansion.
2. Sector Focus: Tires and ContiTech’s 2025 targets are achievable, with Tires alone targeting a 13.3–14.3% margin.
3. Innovation Pipeline: Technologies like the Future Brake System (FBS) and Holistic Motion Control (HMC) position Continental as a leader in electrification and software-defined vehicles.

Risks on the Horizon

• Geopolitical Tensions: Trade restrictions and European/North American production declines (-7% and -5% YoY, respectively) threaten supply chains.
• Margin Volatility: ContiTech’s reliance on industrial demand recovery and Automotive’s narrow margins remain risks.

Conclusion: A Strategic Play for Long-Term Gains

Continental’s Q1 results and restructuring mark a strategic inflection point. With its Tires division thriving, ContiTech investing in green tech, and BofA’s confidence in its execution, the stock appears positioned to capitalize on sector tailwinds.

Key metrics to watch:
- 2025 targets: €0.6–1.0 billion adjusted free cash flow and €19.5–21.0 billion sales for continuing operations.
- Spin-off completion: Finalizing the Automotive division’s separation by September 2025 will reduce operational complexity and unlock value.

While risks persist, the 217.9% EBIT surge and disciplined strategy suggest Continental is steering toward a brighter horizon. For investors seeking exposure to automotive innovation and restructuring plays, this Buy-rated stock deserves serious consideration.