Peugeot-Citroen Ahead Of Recovery Schedule

Peugeot-Citroen Ahead Of Recovery Schedule.

Profit Target Expected Two Years Early.
Product Pipeline Divides Opinion Though.

Peugeot-Citroen’s recovery plan is speeding along ahead of schedule, but satisfied investors are nevertheless pointing to the fact that targets have been deliberately set low to “under-promise and over-deliver”.

Investors were summoned to Peugeot’s head office in Paris for a detailed look at how the “Back in the Race” plan for 2014-2018 is going, since it was unveiled by CEO Carlos Tavares just under a year ago. The plan set a two per cent profit margin for 2018, which many analysts thought would be easily achieved. The plan also involves the cutting of inventory, production costs and the company’s model range from 45 to 26 models by 2022.

A few days after the meeting Peugeot-Citroen’s chief financial officer Jean-Baptiste de Chatillon announced that the company was going after the two per cent margin target as soon as possible, but didn’t say when.

Max Warburton, analyst at Bernstein Research, reckons the two per cent margin target is close.

“A lot rests on whether one believes Tavares can now turn the company into a genuinely profitable – e.g. five per cent margin – business. The meeting produced some encouragement, but some serious questions remain about unclear brands, excessive product proliferation, thin gross margins, and arguably shifting strategy,” Warburton said.

He pointed out that Peugeot-Citroen is making progress.

“We must not forget that (Peugeot-Citroen) has only been out of intensive care for a short while and the Auto division made a grand total of just €63 million of operating profit in 2014. Tavares is playing the “under-promise and over-deliver” game,” Warburton said.

Last year’s operating profit compared with a €1.04 billion loss in 2013. The company’s overall net loss shrunk to €555 million from €2.23 billion. After the results announcement Commerzbank said the Automotive division could generate over a 2.4 per cent margin in 2016, and estimated the margin in 2015 would reach 1.6 per cent.

Upcoming models
Commerbank analyst Sascha Gommel said the Paris meeting showcased upcoming new models.

“We came away with the feeling that the pipeline for 2016 and beyond is well filled, which had been a concern in recent months,” Gommel said.

Bernstein’s Warburton was less impressed describing the new models as “just a bit anodyne”.

“Take the badges off and they could be anyone’s products – Korean, GM or even one of the better and yet to be produced Chinese concepts,” Warburton said.

(The French government and Dongfeng Motor Corp of China subscribed to a €3 billion share issue which gave them both 14 per cent stakes in Peugeot-Citroen, and diluted the family ownership to the same amount.)

Warburton questioned the DS, upmarket strategy.

“Can (Peugeot-Citroen) afford to spend 15 years building DS? It’s not going to be cheap and if the company is honest with itself, the DS range contains only one hit – the DS3. While we admire the idea of DS and its French luxury connections, it’s clear that building a premium brand from scratch is going to be incredibly hard,” he said.

Evercore ISI expects the two per cent margin to be achieved next year, and awaited the next phase of “Back in the Race”, which it said was a turnaround strategy, not a growth strategy. At the Paris meeting, Peugeot-Citroen underlined that between 2019-23, all future products would have a five per cent target margin.

Eight speed gearboxes
Evercore ISI analyst Arndt Ellinghorst said SUVs were the focus of Peugeot-Citroen’s product plan, which also featured gasoline plug-in hybrids from 2019 with 50 kilometres of pure electric drive and eight speed gearboxes. Ellinghorst liked what he heard about Peugeot-Citroen’s intentions on pricing.

“We have long been critical of the industry’s focus on volumes at all cost and believe (Peugeot-Citroen’s) strategy to concentrate largely on improving pricing and market position, if achieved, will place the company well for the future – potentially enhancing brand equity. Indeed the bigger question in our minds is whether Peugeot–Citroen can deliver improved pricing. There are positive signs but it remains to be seen if they will in fact deliver,” Ellinghorst said.