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Investors Sift Peugeot Evidence, Produce Differing Outcomes

Efficiency Gains Expected; Long-Term Plan Achievement Seen.
Or – Scale Deficiency, Harsh Competition Stymies Future.

Peugeot has been a laggard in the drive for more manufacturing efficiency but is poised to make big gains as it fulfills its restructuring plan according to one investor, but others see more negatives ahead as it faces increased competition from Renault and Volkswagen.

Berenberg Equity Research said Peugeot lacks scale and is currently at the peak of its new model cycle, while Renault and Volkswagen are poised to reach theirs.

That doesn’t bode well for profit margins.

Peugeot will also find it difficult to find the money to meet challenging CO2 targets.

“Lack of scale and low R&D budget makes it hard to be competitive in new technologies. Peugeot lacks a plug-hybrid like VW’s and may be unable to pass on higher costs to meet Euro6 emission standards in Europe, required from September 2015,” Berenberg analyst Adam Hull said in a report.

At the Paris Car Show, Peugeot is showing an SUV concept, the Quartz, with a plug-in hybrid petrol electric powerplant, as well as a hybrid-air powered car. It’s not clear yet when or if they will reach customers. VW has recently launched a plug-in hybrid version of the Golf, and revealed a Passat version in Paris. Renault is showing the Eolab in Paris with a plug-in hybrid motor.

Peugeot surprised investors with a cut in losses to €114 million in the first half of 2014 from €471 million in the same period of 2013, as operating cash flow jumped to €1.67 million from €471 million. The auto division made a €7 million half year operating profit after a whopping loss of €538 million in the same period of 2013. Peugeot lost more than €7 billion between 2012 and 2013.

Dongfeng
Family owned Peugeot needed bailing out and it persuaded the French state and Dongfeng Motor of China to take 14 per cent stakes in the company. The deal diluted the Peugeot family stake to 14 per cent also, from 25.3 per cent. The company appointed a new CEO, Carlos Tavares, who authored a turnaround plan called “Back in the Race”. This calls for a two per cent operating profit margin by 2018 rising to five per cent between 2019 and 2023, the dumping of uneconomic models, and an attempt to move upmarket using the DS brand.

Bernstein Research analyst Max Warburton said Peugeot was slow to embrace lean manufacturing but it has the potential to slash labour hours per car by 20 per cent and improve quality which could be worth as much as €500 million a year.

Warburton said the turnaround plan would be easy to achieve.

“Is this the least ambitious plan ever seen in the industry? Or the most brilliantly realistic? The more we look at these targets, the more convinced we become that they are hugely conservative – deliberately so. The auto business was already breakeven in the first half of 2014. To make a two per cent margin, all it needs is 10 per cent higher revenues with unchanged mix – using a 20 per cent operating leverage assumption. Or with slightly better mix and some actions on cost, it can be achieved with much more modest levels of growth,” Warburton said.

Stumble required
But Berenberg’s Hull remains to be convinced. He agrees CEO Tavares is making progress, but thinks it will be very difficult for Peugeot to move from being a European player to a truly global one. Ideally, one of its competitors should stumble and let Peugeot in, but that doesn’t look likely.

“Peugeot needs a significant player to pull back in Europe and competitive pressure to ease in Brazil and Russia. We do not see this happening,” Hull said.

“Opel, which was close to being sold or drastically scaled back, is now supported by GM, which has good cash flow. Ford is in reasonably good shape. The VW brand and Peugeot-Citroen’s closest competitor Renault, are about to enter the sweet-spot of their model cycles in Europe. Fiat has lost share, but (Renault’s) Dacia and (VW’s) Skoda have made big gains,” Hull said.

The glass is half full though, according to Bernstein’s Warburton, with Tavares firmly at the helm.

“With Tavares at the controls, we believe rapid progress is being made,” he said.

Peugeot Citroen will take out more cost than any other manufacturer in 2015, and make more market share progress.

“We’re now modeling automotive revenue growth of five per cent and an Automotive margin of 2.2 per cent. We’re convinced (Peugeot-Citroen) has the potential to beat its 2018 guidance as early as 2015,” Warburton said.

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