This tire-makers stock is idling heres why its time to rev up the buying

Investors have been tapping the brakes on German tire maker Continentals shares lately, leading a bunch of bulls to say the stock may be a smart buy.

A mid-April profit warning tied to the strengthening euro has put pressure on the stock. Gains for the currency, which is up about 10% against the dollar over the past 12 months, tend to cut into overseas revenue generated by multinationals such as Continental AG
CON, +0.27%
.

In that warning last month, the companys management said exchange rate and inventory valuation effects would hit first-half earnings as well as cut into profit margins. But strategists at Germanys DZ Bank have remained upbeat, recently adding the stock to their equity long ideas list.

The negative share-price reaction after Continentals outlook adjustment seems overdone to us, the banks team wrote in a note. The margin adjustment is triggered by two one-time effects and will have no negative impact for mid- to long-term margin development.

Its possible that the euros recent rally is over. That would give a lift to Continental, which generates about 20% of its revenue in the U.S., while China, Japan, and the United Kingdom each contribute 4% to 5%.

After wallowing under $1.05 in early 2017, the euro
EURUSD, -0.4838%
rose above $1.25 in February, but its lately fallen back to around $1.20. Bank of America Merrill Lynch strategist David Woo recommended selling the euro in a recent note, citing factors such as weakening eurozone economic data.

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While Continental is best-known for its tires, the company also ranks as a big player in powertrain manufacturing, brake systems, car-interior electronics, and other auto components. DZ Bank sees sturdy growth ahead overall: We expect an increasing demand for driver-assistance systems, as well as for components for electrified drivetrains. In our view, Continental should benefit from such a development, besides a solid demand for cars worldwide.

Continentals valuation doesnt look that rich. Its shares trade at 13 times estimated forward-year earnings, below the Stoxx Europe 600s
SXXP, +0.50%
multiple of 15. The stock is down about 2% this year, paring its advance over the past 12 months to 8%.

Another part of the bull case is a much-anticipated reorganization that could bring spinoffs. The share price over the coming quarters is likely to be driven by any comments regarding a potential split into several entities, wrote UBS analysts in a recent report, noting that they do not expect Conti to say much regarding a potential separation into several entities before this summer.

The UBS teams sum-of-parts valuation, or breakup-value analysis, suggests Continentals stock could be worth as much as 260 ($312), or 18% above its recent print around 221. The Swiss banks analysts have a buy rating on shares, along with a price target of 253, implying a rally of 14%.

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The Hanover-based company first acknowledged in January that it was considering a revamp. We are in the early stages of analyzing how our organization can become even more flexible in response to the fast-changing environment in the automotive industry, Continental officials said at that time.

The stock surged north of 257 in January thanks to the breakup chatter, before pulling back. Continental soon might take a trip back to that area, if investors like how its reorg effort turns out and if the euro becomes less of a drag.

This report also appears at Barrons.com.

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