I've often said that investors should be slow to sell the stocks of good companies only because they look expensive. So does it follow that investors should avoid the stocks of lesser companies even if they look pretty cheap? That's my dilemma with Continental AG (OTCPK:CTTAY) (CONG.XE), as this global giant in auto parts has struggled mightily over the last few years and looks relatively ill-prepared to leverage the transition toward electrified powertrains.
On the positive side, Continental has much better leverage to advanced driver safety (including automation), as well as car connectivity and infotainment, not to mention a profitable tires business that generates attractive margins and cash flow. Low-to-mid single-digit revenue growth and low-to-mid single-digit FCF margin can support a high-single-digit return from here, and the shares likewise look undervalued on the basis of near-term margin recovery potential. Although I have some serious questions and concerns about this business, the valuation already reflects a lot of those issues and I have to wonder if the risk/reward balance skews more toward "reward" today.
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Continental AG Struggling Mightily, And The Market Isn't Pricing In Much Improvement
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