July 31, 2014 / 8:29 AM / in 5 years

Continental raises profit guidance as car demand recovers

BERLIN (Reuters) - German car parts and tyre maker Continental (CONG.DE) raised its full-year profit forecast for the second time in five months after second-quarter underlying earnings rose on improving auto demand and a strong performance by its rubber division.

New car tyres are seen inside the Clairoix Continental tyre factory in this March 12, 2009 file photo. REUTERS/Benoit Tessier/Files

Continental is now targeting a margin on adjusted earnings before interest and tax (EBIT) of about 11 percent, after raising the guidance to at least 10.5 percent in March from a previous 10 percent, the Hanover-based company said on Thursday.

But analysts said the new guidance may not reflect the company’s full earnings potential.

“Conti is typically regarded as being conservative in its guidance,” analysts at Citigroup said in a note, adding that the market expected a full-year operating margin of 11.5 percent. Citigroup has a “buy” rating on Continental shares.

Adjusted EBIT rose 2.6 percent in the second quarter to 1.005 billion euros, in line with a 1.006 billion-euro consensus forecast in a Reuters poll of analysts.

EBIT growth outpaced sales, which fell 0.15 percent during the quarter, thanks to lower raw material costs and stronger profitability at its rubber division.

In the second quarter of 2014, demand for passenger cars in Europe rose 4 percent, figures from Germany’s VDA automotive industry association showed, as countries hit by austerity measures during the crisis experienced a strong rebound.

But Continental said a shift in economic momentum in emerging markets, exacerbated by geopolitical tensions in the Middle East, Russia and Ukraine, would hit sales and intensify currency headwinds.

Instead of exchange rate effects of 700 million euros, Continental now expects a negative effect of about 1 billion euros ($1.34 billion), limiting full-year profit to about 34.5 billion euros, compared with March guidance of about 35 billion euros, Continental said.

Shares in Continental were trading 2.4 percent lower at 160.80 euros by 0800 GMT, underperforming Germany’s benchmark DAX index which was down 1 percent.

Reporting by Andreas Cremer and Edward Taylor; editing by Jonathan Gould and Tom Pfeiffer

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