Continental’s Mix Effects: Another Segment Reporting Financial Analysis Problem

Matthias MeitnerManaging Partner, VALUESQUE

In the past, we already shed some light on the problems of reading the appropriate information from segment reportings of companies, but more in a general way (LINK). This time we provide a concrete example of why understanding segment information is highly important when performing business valuations. Here it is not an accounting problem and it is not a bad-disclosure situation. All relevant information is available in our today’s case. The company does everything correctly. Nevertheless, investors have to use each and every piece of information on segment performance in order not to run into severe valuation problems. This blog post is about Continental AG (Conti), a German automotive supplier.

Conti is a multi-activity supplier. It is structured in five segments: (1) Tire (producing car tires), (2) ContiTech (provides smart solutions made of rubber, plastic, metal and fabric to the automotive industry but also other industrial customers), (3) Chassis & Safety (develops systems aiming to improve driving safety and vehicle dynamics), (4) Powertrain (develops efficient and clean vehicle drive systems) and (5) Interior (provides network, information and communication solutions for vehicles).

While the group in total also suffered a bit from the general weakness of the traditional automotive business in general, it has performed relatively strong in terms of fundamentals at the top-line over the last years. The following graph shows the revenue development of the group (below all group-numbers are depicted as the sum of the single segments, i.e. without taking account of any holding-level effects, which by the way are not material and do not change the general message; all data are taken from Thomson Reuters Eikon, in thousand Euros).

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Obviously the activities in the main segments developed in a relatively smooth and parallel way. We want to have a particular focus on the tire business of Conti in our analysis, and here you can see that the proportion of tire sales (percentage numbers in the graph) has stayed remarkably stable over the years. But if we dig our way down towards the bottom line a bit further (Conti provides all this information) things start to look different. Let’s first have a look at the EBITDA level.

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Now we can observe two interesting things: (1) the relative proportion of the tire business has clearly increased and (2) the stability of the proportions over time got lost. The reason for (1) is that the tire business is a highly profitable one. It generates margins that the other business segments can only dream of. The reason for (2) is that tires have entered into some sort of a pork cycle over the last years. While scarcity effects drove up margins until 2016, the reactions of the broad set of companies competing in the tire business (increasing capacities) kicked-in in 2017 and led to a non-immaterial margin reduction effect.

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It gets even more interesting if we go further down the P&L. Now let’s have a look at the EBIT line at a segmental level.


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