Peugeot Plan To Recapture Market Share Jeopardises Profits
But Share Price Performance Shows Investors Have Faith
Will PSA Build A Factory In Russia?
All Big Europeans Want To Regain Lost Sales, But They All Can’t 

Peugeot-Citroen’s attempt to quickly reclaim lost market share as part of its recovery plan, has investors worried because it might undermine the push to restore profitability.

New CEO Christian Streiff unveiled a bit more of his recovery plan for Peugeot at the annual meeting, and investors were not sure quite what to make of it. The company’s share price performance is an unbiased but quietly eloquent reaction to the direction that Streiff is taking Peugeot.

After the annual meeting in late May, where Streiff outlined a broad plan, the stock price dived 5 per cent. But if you track the share price performance longer term, investors seem to be digging in for the long haul, as the shares have steadily risen from a low of €38.91 back in August 2006, to the current level a couple of days after the meeting, of just under €60.

At the meeting, Streiff reiterated his plan to shed 4,800 jobs in France this year, and also said he wanted to speed up model launches to restore profitability, and would decide by the summer whether Peugeot would build a factory in Russia. Streiff also railed about the strength of the euro against the dollar and the yen, saying this was a big problem for European car manufacturers generally.

“It is the strength of the euro which is creating an enormous handicap versus U.S. and Japanese rivals, allowing imports at unbeatable prices,” Streiff said, adding that the currency problem was undermining Europe’s industrial base.

Claw back lost share
Peugeot-Citroen’s Western Europe market share has dived to just over 13 per cent from a high of 15.5 per cent in 2002. Streiff said the  turnaround programme, CAP 2010, aims to claw back that share.

Peugeot-Citroen’s fixed costs will be cut by 30 per cent by accelerating new model development time, in addition to the annual €600 million cut in overheads that the company has already managed, and warranty costs will be halved, in theory.

“The situation is critical; our automobile division is very close to break-even which is why it’s so urgent to return to sales growth and improve profitability,” Streiff told the annual meeting.

Declining sales had been reversed by the success of the new Citroen Picasso and Peugeot 207, he said.

Investment banks had a mixed reaction to Streiff’s remarks.

Citigroup was encouraged by the cost cuts and quickening model programme, and estimated that the fixed costs cut plan would offer up between €3 billion and €4 billion in total savings by 2010.

But Citigroup worried that the market share recapture plan might be a hostage to fortune.

“Somewhat surprisingly, Streiff has also set a 15.5 per cent Western European market share target for 2010, up from 13.3 per cent in 2006. Given all European OEMs are targeting additional market share, we find this somewhat ambitious, despite 41 planned new models over 2008-10. Pricing maybe the casualty, thus eroding cost-saving benefits,” said Citigroup.

Dresdner Kleinwort agreed.

Sales above prices
“With the 15.5 per cent European market share target, PSA is putting volume above improved pricing,” Dresdner Kleinwort said.

Dresdner Kleinwort, which recommends investors sell their Peugeot shares, wasn’t moved by Streiff’s presentation, saying there was too little detail on financial targets, cost savings, capital expenditure and margin targets.

“Our scepticism is based on an already lean picture of PSA and the relatively weak pricing power of the brands that need to show near-term improvements, like the impact of a full-year of the 207 and the summer launch of the 308, if there is to be any hope of a strong improvement in profitability between now and 2010,” said Dresdner Kleinwort analyst Thomas Aney in Frankfurt.

 Peugeot, Europe’s second biggest carmaker after Germany’s Volkswagen, saw its net profit dive to €176 million in 2006 from €1.03 billion in 2005, while the operating margin fell to two per cent from 3.4 per cent a year earlier. Peugeot issued 3 profit warnings over five quarters, as an ageing model line-up succumbed to fierce competition from Asian and European rivals. Peugeot had achieved an operating margin of a healthy 5 per cent as recently as 2002. Sales in the first quarter of 2007 rose 6.5 per cent from a year earlier to €14.87 billion. Peugeot only reveals profitability every six months.

Diesel hybrids
Other investment banks have expressed confidence in Peugeot’s future though, banking on the Picasso and upcoming Peugeot 308, Peugeot 4007-Citroen C-Crosser compact SUVs, small vans and new derivatives based on the little 207. The company is well positioned to take advantage of the drive to cut carbon dioxide (CO2) emissions because of its leadership in small diesel engines. Peugeot’s Citroen subsidiary is making progress with diesel hybrids.

Deutsche Bank pointed out that more details of CAP 2010 are promised in September and expressed doubts over what has been revealed so far, saying it sounded remarkably similar to other plans by big Europeans.

And before that news, investors will have to digest the results for the first half of 2007, which are expected to be dire.

“This is a very familiar recipe in the industry. While we are convinced that the group will reduce costs, top line growth is more challenging, especially in Europe, with a special focus on Germany,” said Deutsche Bank.

Givebacks
Sales gains will inevitably mean givebacks to buyers.

“To regain market share in a zero sum game industry, the group will pass on to customers the vast majority of these incremental cost savings,” it said.

Citicorp though was keeping the faith.

“In general, Streiff’s initial plan appears broadly encouraging, with no shortage of ambition in cost savings. If achieved and retained, PSA should be able to exceed its past 5 per cent peak margins,” said Citigroup.


Neil Winton – June 1, 2007

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