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UPDATE 2-Continental drops as profit warning sparks R&D worries
October 17, 2016 / 5:00 PM / a year ago

UPDATE 2-Continental drops as profit warning sparks R&D worries

* Now sees 2016 group adj EBIT margin above 10.5 percent

* Previously expected margin of more than 11 percent

* Analysts say additional R&D expenses most worrying

* Shares fall more than 3 pct to lowest since July (Adds share price, analyst comment)

By Maria Sheahan

FRANKFURT, Oct 18 (Reuters) - Shares in Germany’s Continental AG dropped to their lowest in more than three months on Tuesday after the automotive supplier cut its profit guidance for the year, partly due to an increase in research and development spending.

Late on Monday, Continental said its annual results would take a 390 million euro ($437 million) hit from warranty cases for unspecified products as well as possible expenses for pending antitrust proceedings.

But what analysts said was more worrying was that the company also hiked its spending on the development of infotainment systems and environmentally friendly drive systems by 60 million euros ($67 million).

“We believe Conti may have overinvested in technologies that may prove to be fleeting in nature and with lower than anticipated payback,” analysts at Barclays said.

They stuck with an “equal weight” rating on the stock but cut their price target to 178 euros from 184 euros, saying the company’s tyre-making business, traditionally a cushion for downturns on the car parts side, was likely at a peak.

Analysts at Evercore ISI, who recommend selling Conti’s stock, said they believed the additional R&D spending was related to a push by German carmakers for more plug-in hybrid vehicles, adding they saw it being a drag on earnings next year as well.

Shares in Conti were down 3.2 percent at 169.75 euros by 0734 GMT, making them the only decliners on Germany’s blue-chip DAX index, which was up 0.8 percent.

Further weighing on results, Conti said a third earthquake in Japan’s Kumamoto region in August worsened the situation of an important supplier of micro control units located there, resulting in lost sales of at least 100 million euros.

Conti now expects the 2016 margin on adjusted earnings before interest and tax (EBIT) at its Automotive business, which accounts for about 60 percent of group sales, to come to more than 6.5 percent, compared with previous guidance for more than 8.5 percent.

The group margin will be above 10.5 percent, versus a previous forecast for more than 11 percent, Conti said. It affirmed its forecast for 2016 sales of around 41 billion euros before exchange-rate effects.

$1 = 0.8928 euros Reporting by Maria Sheahan; Editing by Susan Thomas and Mark Potter

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