Continental AG (CON DE), the German auto supply companies came out with a profit warning on the 22nd of August. As can be seen below the share dropped more than 15% on that day
This was the second profit warning in a row from Continental (CON DE), as it had already lowered its guidance numbers in April. All of this comes on the back of the heel of tariffs disputes between US and Europe (see previous Askbrokers.com article here).
Continued heated rhetoric between US and China has also affected sales, as Beijing’s increase of auto-tariffs for US companies hit total sales with 4%.
As a trader, trading post an announcement, let be a profit-warning, or merger is often too late, as markets are very fast at pricing in the effect. Hence it is good for various industries to know the various supply-chain structures, to be able to invest and trade the 2nd or 3rd order effects or general themes or announcements. Call it the second or third derivative of the major event/move.
As cars are using more and more electronics within them, looking at Semiconductor space with companies with high exposure to the Auto sector, could potentially be another sector that will be getting hit from the decline in auto-demand. This is not the obvious trade, many miss these type of cross reads, but these kind of plays offer interesting risk/reward scenarios.
Within the semiconductor space, NXPI (NXPI US) and ON Semiconductor (ON US) are potentially interesting plays. NXPI gets almost 50% of its revenue from the auto-sector whilst, the same figure is almost 1/3 for ON Semiconductor (ON US).
NXP, 1 month chart.
ON Semiconductor, 1 month chart.
As can be seen above – since Conti’s (CON GY) profit warning on the 22nd of August both NXPI (NXPI US) and ON Semiconductor (ON US) are up roughly 1.5%.
There could be several reasons why these stocks have not been affected, as investing/trading is not an exact science.
It could be that investors see good growth potential in other parts of these semiconductor companies, or that investors in general are more bullish on semis than auto-part suppliers.
Or, it could be that this is something investors as of now have not factored in, creating a potential trade opportunity.
Either way, as an investor and trader, should want to take advantage of news of various forms to try to get a good sense and understanding of the supply-chain in industries and companies they follow, as it can create interesting trading opportunities.
Below chart shows the US names and Continental (yellow) over the past month.
Source: charts by Bloomberg
