Peugeot-Citroen Edges Into The Black; Investors Expect More.
“Three-headed monster” Confounds Critics.
Recovery Plan Targets Look Set To Be Met Early.
Will DS Strategy Survive Residual Value Test?
Peugeot-Citroen is clawing its way out of financial trouble and investors reckon its deliberately conservative recovery targets will be met with ease.
Most investors, that is.
The French government and Dongfeng Motor Corp of China will be relieved too. They 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. The French media dubbed this unwieldy-looking structure as the “three-headed monster” or the “lion with three heads.” The Peugeot corporate logo shows a lion, with one head.
But it seems to be working.
In 2014, Peugeot-Citroen auto manufacturing made an operating profit of €63 million, compared with a €1.04 billion loss the previous year. The company’s overall net loss shrunk to €555 million from €2.23 billion.
“Peugeot’s 2014 results beat expectations and provide strong evidence that CEO (Carlos) Tavares’ turnaround plan (called Back in the Race) is working. We believe the Automotive division can already generate over a two per cent margin in 2016, which would be two years ahead of plan,” said Commerzbank analyst Sascha Gommel.
“The automotive business reported a positive result for the first time since 2010. We estimate that the margin in 2015 will already reach 1.6 per cent and 2.4 per cent in 2016,” Gommel said.
After making some jokes about how small the operating profit was and wouldn’t buy you much these days, Bernstein Research analyst Max Warburton said the black numbers bought Tavares credibility.
“Credibility for the new CEO, for his turnaround and for the future of this company. In one year new CEO Tavares has dragged Peugeot back from the abyss – he took on a company that had lost €1 billion in the auto division in 2013 and had suffered cumulative Auto division losses of €3.5 billion since 2008. Now he presides over a company that is profitable – just – and generated €2 billion of cash in a year, hitting a 2014-2018 target in just one year,” Warburton said.
Warburton cautioned though that Peugeot’s need to raise prices won’t be helped by what he called a limited new model programme, and tough markets.
Berenberg Bank analyst Adam Hull was something of a sceptic, saying competitors like VW, Daimler and Renault were cheaper to buy and structurally better placed.
“Peugeot is at the peak of the model cycle whereas the Renault, brand its closest competitor, will have the double positive of the all key mid-to-large cars being replaced within 18 months,” Hull said.
“We expect the full benefits of the cost cuts to feed through in 2015-16: we assume Autos EBIT (earnings before interest and tax) rises to €570 million in 2015, a 1.5 per cent EBIT margin, and then to €750 million in 2016 – a 2.0 per cent margin,” Hull said.
Hull said it will be difficult for Peugeot to move from being a European player selling globally to a true global player as “Back in the Race” targets. He also has some doubts about the DS brand, which seeks to raise prices by adding content and styling tweaks.
“The DS strategy has helped raise prices but it remains to be seen how successful it will be once the initial design-led novelty wears off (if quality is significantly higher, residuals will be significantly higher),” Hull said.
Evercore ISI was impressed with the progress made so far but had worries about the longer term.
“Peugeot still has as long way to travel. And the company’s five per cent automotive operating margin target in 2019-2023 is still two years further out than the five per cent target by peer Renault by 2017. Yet on a fully diluted basis, Peugeot remains substantially more expensive than its French compatriot, where we see better value,” Evercor ISI analyst Arndt Ellinghorst said.
Ultra conservative ratings agency Moody’s Investors Service was moved to raise its rating on Peugeot investments, saying there is potential for further profit increases in the next 12 to 18 months, thanks to efficiency measures and despite an expected slowdown in sales growth in Europe this year. It likes Peugeot’s new breakeven point of 2.1 million cars a year, excluding China, from 2.6 million, bringing it close to the goal of 2 million. But it had reservations.
Weak compared with competition
“Moody’s expects additional cash restructuring costs in the next 24 months to slow down the company’s adjusted margin and cash flow improvement. Overall, Peugeot’s operating margins remain weak compared to those other rated mass-market manufacturers,” said Moody’s analyst Yasmina Serghini-Douvin.
Citi Research analyst Philip Watkins raised his auto earnings target estimate to €640 in 2015, up from his previous estimate of €520 million. But there could be problems.
“With fewer new model launches we think Peugeot will not be able to retain its current product mix momentum. Essentially, therefore we see most of the advance in earnings as coming from cost savings and with potential upside on volumes should the European market prove more healthy than we currently assume,” Watkins said.
Commerzbank’s Gommel sees sunlit uplands ahead for Peugeot, and recommends investors buy the shares.
“Although Peugeot (the stock price) has already showed a stellar performance in 2015 year to date – up 43 per cent – we see further upside for the stock. The turnaround of the Automotive business is progressing faster than expected and we see further positive surprise potential,” Gommel said.