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Europe’s Rally Goes On, But Investors Worry About Quality

Easy Comparisons Put False Shine On Numbers.
Discounts, Self-registrations, Scrappage Undermine Bottom-line Impact.

Auto manufacturers may be getting excited about the long-awaited rally in European car sales, but investors are losing belief, worried about the quality and power of the turnaround and spooked by danger signs that important profit centres in emerging markets are over-heating.

Two of the companies said to be over-reliant on Europe, Renault and Peugeot-Citroen which should be in the front line of beneficiaries to a rally, reported strong sales in the first quarter. Peugeot-Citroen’s European sales rose 16 per cent in the first quarter over the same period last year. Renault improved its sales 18 per cent. Overall sales in Western Europe rose 9.5 per cent in March, bringing the total for the first three months to a 7.2 per cent gain, and the seventh successive monthly rise.

But a closer look at Peugeot-Citroen and Renault first quarter sales (neither of these French companies reports profits in the first and third quarters) took the shine off the performance. Peugeot Citroen revenues only inched ahead by 1.9 per cent, while Renault’s declined by 0.1 per cent.

How could this be?

Firstly, the sales performance by Peugeot-Citroen and Renault wasn’t that great compared with the weakness in the previous year’s performance. And the Wall Street Journal’s Heard on the Street columnist Renee Schultes came up with these reasons too.

“One culprit is emerging market currencies weakening against the euro, which hit both companies sales. But the reality is the recovery in European car sales still isn’t that strong and could disappoint further,” Schultes said.

Quality questionable
Peter Fuss, analyst at Ernst & Young’s Global Automotive Center, also thinks the quality of the turnaround in Europe is questionable.

“There should be significant concern about artificial growth – one that is driven by discounts, self-registrations and scrappage schemes – and the impact on bottom-line, which continues to be under severe pressure,” Fuss said.

“We expect the recovery to continue for the rest of the year and car sales to grow by at least three per cent for 2014 (in the E.U.). Discounts and self-registrations are anticipated to decline only gradually as economic fundamentals improve and normal levels of demand set-in,” Fuss said.

Fuss doesn’t expect sales to return to pre-crisis levels even by the end of the decade. Buyers are shifting to short-term car rental schemes, the young are losing interest in car ownership, and many cities are actively deterring car use.

“Amid these changing trends, we anticipate small fuel-efficient cars suited to urban conditions to outperform the overall market. The other vehicle segment that is likely to witness significant growth is the compact SUV segment,” Fuss said.

Caution
IHS Automotive analyst Carlos Da Silva also urged caution, although he said the rally in sales was likely to benefit most European manufacturers.

“In absolute terms, European sales are navigating in very low tide. Any positive evolution is indeed good news, but should not hide the fact that there is still a long road to cover until more sustainable levels are reached,” Da Silva said.

The Journal’s Schultes pointed out that sales in Britain are close to a record, as are Germany’s. France looks fragile, and investors should be wary.

“With Peugeot shares up 35 per cent this year and Renault up one-fifth, a speedy recovery already looks priced in. Investors should take their foot off the gas,” Schultes said.

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