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Investors Scramble To Raise Renault Profit Estimates

Renault Expected To Benefit From Nissan’s U.S. Rally
Talks With Daimler Promise Salvation To Structural Problems

Investors are getting excited about Renault’s prospects, for the first time for a long time, as estimates of losses for 2009 are slashed, and profit projections for the future are boosted by improved prospects from alliance partner Nissan.

News from French daily newspaper La Tribune that Renault and Daimler are in “active” talks over a global industrial partnership, also heartened investors. The plans, while falling short of any equity stakes, were said to cover collaboration on common platforms for the future Smart range, electric cars, and engine and technology exchanges.

Deutsche Bank embraced the idea.

“We believe the automotive industry is rife (sic) for consolidation as utilisation rates are low and sales volumes will likely be below “pre-crisis” plans for several years to come. Large M&A deals are nevertheless less likely, both in the absence of striking opportunities and the poor track record of such combinations in the past,” said Deutsche Bank analyst Gaetan Toulemonde.

“Closer cooperation (between Daimler and Renault) could address some of the most pressing structural issues that both companies face. We believe cooperation could address fundamental strategic problems facing both companies,” Toulemonde said.

Loss forecast slashed
Credit Suisse slashed its forecast for Renault’s 2009 operating loss to €280 million from €470 million, raised its free cash flow estimate to €1.6 billion from €1 billion, and said its core business likely made a profit margin of two per cent in the second half of 2009, when sales were boosted by European car scrapping incentive schemes.

Renault lost €2.7 billion in the first half of 2009 compared with a net profit of €1.5 billion in the same period of 2008 – a swing of more than €4 billion.

“Clearly we expect momentum at Renault core to fade during 2010 as scrappage overhang effects take hold. Fortunately at this time momentum at Nissan should be accelerating. Nissan is currently enjoying the strongest U.S. sales performance of the Japanese names, following the introduction of the Cube compact car,” said Credit Suisse analyst Stuart Pearson.

Pearson also expected Renault to finally sell its Volvo truck stake in the first half of 2010 for about €3 billion, Nissan might resume its dividend payments as soon as the second quarter, while the alliance’s cost savings were going well. Earlier this year, analysts were saying Renault might raise only €2 billion from a sale of its Volvo stake.

More profits in 2010
Bank of America Merrill Lynch also signed up to the Renault appreciation society, predicting a 2.3 per cent group profit margin in the second half of 2009, and 3.3 per cent for 2010.

“Renault currently benefits from the strongest product momentum among European manufacturers after the replacement of key Megane derivatives. The (Renault) shares offer the strongest indirect exposure among European auto stocks to the U.S. via Nissan. We continue to expect U.S. volumes to recover earlier than European sales and Renault to benefit indirectly,” Merrill Lynch said in a report.

Not everyone is falling over themselves to praise Renault. The Wall Street Journal’s Heard on the Street column reckons it is a risky investment, saying the core business is worth little, quoting Barclays Capital.

Although Renault’s second half 2009 sales growth was encouraging, the column said it remains a loss maker.

“Renault is paying the price for neglecting its European business as it focussed on turning around Nissan and launching its Dacia emerging market brand. Renault now has a smaller product range than Peugeot-Citroen or Volkswagen, which muscled in to the people-carrier segments Renault once dominated. Efforts to crack the market for luxury sedans have been dismal,” it said.

Take a punt
Some investors might see past the problems and take a punt on Renault’s success.

“(Renault’s) weak product range and thin margins leave it vulnerable to competition as (scrapping) programs are wound down. But with Renault’s cars suddenly in demand again, the shares are a risky bet on the fledgling turnaround in the European car industry,” Heard on the Street said.

Analysts have been worried by Renault-Nissan CEO Carlos Ghosn’s commitment to battery powered cars as a potential danger to the company’s future. Ghosn’s forecast for global battery powered car sales – 10 per cent in 2020 – is dramatically higher than most of the competition. Volkswagen reckons battery power will account for only between 1.5 and 2.0 per cent by 2020. Forecaster IHS Global Insight sees only 0.6 per cent of the global market battery powered by 2020.

Perhaps the current flurry of excitement about Renault’s short-term prospects will calm down a little when longer-term factors move on to the radar.

Neil Winton – January 15, 2010

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