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‘Con’ Job: World’s Second-Largest Car-Parts Maker Drives Off A Cliff

Don't worry, tariffs will fix it.

Let me tell you what European auto stocks didn’t need right about now: they didn’t need a guidance cut from Continental, which now sees group revenue for 2018 of ~€46 billion versus ~€47 billion previously. The company also cut margin and FCF guidance.

This is the second guidance cut this year from Continental, a heavyweight in the global market for auto parts. The company is apparently having a difficult time keeping pace with epochal shifts in the market.

“There are huge question marks around the timing of the transformation from combustion engines to electric cars, or fuel cells, or synthetic fuels,” CEO Elmar Degenhart said last month, on a call announcing a restructuring that includes a spinoff of the powertrain division. “That’s why it’s prudent to make ourselves more flexible now”, he added.

Today’s guidance cut comes courtesy of higher spending on new tech and lackluster sales in China and home markets. Suffice to say the market isn’t loving it. Specifically, the shares are having their worst day since the crisis, down a truly horrible 14%..

CON

As alluded to above, this latest warning from Continental comes at a particularly inopportune time. The Stoxx 600 Automobiles & Parts Index has been under pressure all year long thanks in no small part to Donald Trump’s threat to tax European autos.

The “deal” Trump struck with European Commission President Jean-Claude Juncker late last month didn’t resolve the auto tariffs issue and on Tuesday evening, Trump said this at a rally:

(Trump speaks in West Virginia, Tuesday, August 21, 2018)

Despite that, the SXAP was gunning for a third straight day of gains before the Continental news hit. Now it’s on pace for its worst day since the Juncker meeting (European markets were closed by the time Juncker and Trump held their press conference in the Rose Garden last month). The index is sitting at a fresh low for the year.

SXAP

This comes after a series of warnings from global automakers who have variously cautioned the Trump administration that the proposed auto tariffs are likely to be a bad idea, especially in light of existing tariffs on some inputs. In late June, Daimler cut guidance, in what amounted to the first tariff-related profit warning from a large multinational.

On Tuesday, Berenberg suggested the good times may be over for the industry.  “An automotive cycle that until 2017 was lifted by a combination of cheap credit, cost deflation, under investment, and currency tailwinds is by all appearances drawing to a close”, analysts wrote.

Don’t worry, tariffs will fix it.

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