New Peugeot Plan Prompts Stock Dive, But Investors Positive.
Previous Profit Target Tripled, 26 New Cars With Plug-ins, Electrics.
“However, the decision to re-enter the U.S. raise some question marks and bears the risk of an expensive adventure”
Peugeot’s new long-term strategic plan was given the thumbs down by the stock market, although some investors liked what they heard and recommended buying the company’s shares.
Peugeot shares dived seven per cent when CEO Carlos Tavares unveiled “Push to Pass”, which called for a tripling by 2012 of the previous “Back in the Race” plan of a two per cent automotive profit margin by 2018. The plan called for 26 new cars, eight commercial vehicles and a pickup truck, as well as seven plug-in hybrids and four electric vehicles.
“Based on our financial reconstruction, we will launch a global product and technology offensive. We will ensure (Peugeot’s) profitable organic growth,” Tavares said in a statement.
A couple of weeks after the announcement, the shares hadn’t recovered much, but at least hadn’t dropped any more.
One new car will be unveiled every year for each of the brands – Peugeot, Citroen and DS, while feelers will be put out to test the water for a return to the U.S. market via car-sharing and mobility services.
HSBC Global Research recommended investors buy Peugeot shares, saying the plan’s targets are reasonable.
“Nevertheless, (Peugeot-Citroen) is stuck in the dilemma that they have achieved by now a high level of profitability already and a lot of investors do not believe that this is sustainable,” said HSBC analyst Horst Schneider.
In 2015, Peugeot-Citroen made a net profit of €1.2 billion, its first profit in three years, and compared with a loss of €555 million the previous year. Automotive operating profit was five per cent.
In 2014 Tavares set a two per cent profit margin goal for 2018, which at the time was ridiculed for being under-ambitious.
Peugeot was on the brink of bankruptcy a couple of years ago and was saved by a €3 billion state-backed rescue plan after racking up more than €7 billion in losses over a couple of years. France and Chinese carmaker Dongfeng each bought 14 per cent of the company. The Peugeot family stake was reduced to 14 per cent.
Hold don’t sell
Berenberg Bank raised its recommendation from “sell” to “hold” on Peugeot-Citroen shares, saying it liked stronger than expected first half profit margins at the company, better than expected European car market sales, and the company’s expectations for a four per cent profit margin in 2016 and 2017.
But analyst Adam Hull had some reservations.
“Peugeot remains strategically challenged due to its low average selling price and minimal premium brand exposure, making it very difficult to pass on the costs of new technology, and its lack of scale,” Hull said.
Peugeot’s lack of financial resources will make it difficult for it to develop autonomous driving and connectivity. Hull liked the possibility that Peugeot might decide on a strategic alliance, although he conceded these deals either disappoint, or take years to work, citing the 16 years it took Renault Nissan to get a shared platform vehicle on the market.
There are other worries too.
“The sweet spot of the Peugeot model cycle is in the past and 2017-17 will see much more competition in medium to large cars, and SUVs from Renault and VW,” Hull said.
Commerzbank was worried by the possible return to the U.S.
“At first glance, the new plan appears in line with expectations. However, the decision to re-enter the U.S. raises some question marks and bears the risk of an expensive adventure,” Commerzbank analyst Sascha Gommel said.
Despite that Gommel was positive about the plan, after reducing estimates for 2016, but declaring more confidence in 2017.
“We continue to believe in (Peugeot-Citroen’s) investment case and CEO Tavares’ strong execution skills,” Gommel said.
Investment researcher Evercore ISI wasn’t so sure.
“Pousser à Passer“
Given that the company delivered (approximately) 5 per cent operating margin in 2015 and somewhat anaemic top-line growth assumptions, we don’t believe the plan will have (Peugeot-Citroen) investors ecstatic,” Evercore ISI analyst Arndt Ellinghorst said.
Meanwhile, for anyone wondering why the plan is called “Push to Pass”, it isn’t an opaque translation of the French, but apparently reflects CEO Tavares’ background as a motor sports enthusiast. “Pousser à Passer” though sounds a bit more mysterious and a lot less aggressive.
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