Continental AG: Reinventing as a Tire Titan Through Strategic Focus

Continental AG's transformation into a streamlined tire-focused enterprise marks a bold pivot to unlock shareholder value. By divesting non-core assets and spinning off its automotive division, the German conglomerate aims to sharpen its focus on its profitable tire business while positioning itself to capitalize on resilient demand for premium tires. Here's why these moves—and their financial implications—could make Continental a compelling investment.

Strategic Restructuring: From Conglomerate to Pure-Play Tire Giant

Continental's decision to sell its ContiTech industrial rubber division by 2026 and spin off its Automotive business into Aumovio by September 2025 represents a radical simplification. The ContiTech sale, expected to generate proceeds for a special dividend or share buybacks, will allow Continental to concentrate on its tire division, which accounted for 77% of sales in 2024 and benefits from strong brand equity and operational efficiency. Meanwhile, Aumovio's independence could reduce complexity for investors and enable the new entity to pursue software-driven mobility solutions without diluting tire division priorities.

Financial Targets and Shareholder Returns: A Path to Value Creation

While Continental's revised 2025 guidance reflects near-term headwinds—lower sales and margin targets for both the group and tire division—the long-term outlook remains robust. The tire business, now the company's core, is projected to generate €13.5–14.5 billion in sales and a 12.5–14% EBIT margin, underpinned by demand for premium tires (e.g., ultra-high-performance tires, which represent 39% of global car tire sales). The ContiTech sale, once finalized, will free capital for returns to shareholders, with the distribution range of net income raised to 40–60%, up from 20–40%.

Resilience in Tire Markets: A Steady Growth Engine

The tire division's resilience stems from its dominant position in high-margin segments. Continental's winter tire expertise in Europe and growth in North America and Asia provide a stable revenue base. Ultra-high-performance tires—critical for luxury and electric vehicles—are a tailwind, with the Continental brand capturing 48% of such sales globally. Even as trade barriers and currency fluctuations pressure margins, the company is reconfiguring supply chains and negotiating cost-sharing agreements to mitigate risks.

BofA's Bullish Call: Why the Spinoff Matters

Bank of America's “Buy” rating reflects confidence in the strategic execution of these moves. While the target price was trimmed to €97 (from €100) due to lower tire industry multiples, BofA views the ContiTech sale and Aumovio spinoff as key catalysts for valuation re-rating. The spinoff's success hinges on Aumovio's ability to deliver on its long-term financial targets: exceeding €24 billion in sales and achieving 6–8% EBIT margins by scaling software solutions like autonomous driving systems.

Risks and Considerations

Bear-case scenarios include execution risks: delays in asset sales, trade tensions worsening, or Aumovio's unproven software business failing to meet targets. The current share price of €74.42 trades at a 10x forward P/E, below peers' 12–14x multiples, suggesting undervaluation if the restructuring succeeds.

Investment Thesis: A Wait-and-See Buy

Continental's pivot to a pure-play tire giant is a high-stakes bet, but one backed by a compelling value proposition: a cash-generative core business, disciplined capital allocation, and strategic focus on high-margin markets. While near-term guidance revisions are a concern, the long-term vision aligns with BofA's thesis. Investors seeking exposure to a resilient industrial sector with clear growth drivers may find Continental worth adding to a watchlist, particularly if the ContiTech sale proceeds and Aumovio spinoff execute smoothly.

In conclusion, Continental's transformation is less about short-term gains and more about building a durable, focused enterprise primed to capitalize on premium tire demand and emerging mobility trends. For shareholders, this could mark the beginning of a new era of value creation.