But Profitability Worsens, Casting Doubts Over Improved Forecast
Peugeot-Citroen surprised investors with stronger than expected profits in 2010, but the company’s prediction that auto profits would increase again in 2011 was met with raised eyebrows.
Investment bankers reckoned that European overcapacity, market fragmentation, pricing pressure from market leader VW, coupled with stagnant sales in Europe, and Peugeot-Citroen’s difficulties making money outside of its home continent would make improving profits difficult.
In 2010, PSA Peugeot-Citroen reported net income of €1.13 billion, compared with a loss of €1.16 billion the previous year. Investors had expected the company to report net profit of about €970 million.
“Investors expressed scepticism about the company’s 2011 guidance, which calls for Auto profits to increase, despite rising commodity costs, a French market that is expected to decline 10 per cent in 2011, and an overall European market that is expected to be flat in 2011,” said J.P.Morgan auto analyst Ranjit Unnithan.
Peugeot-Citroen has been slower than its competitors diversifying outside of Europe. Last year 39 per cent of its sales were generated outside Europe. It plans to raise this to 50 per cent by 2015.
The company’s results showed that in fact the Auto sector of its business was getting less profitable during the second half of 2010, like its compatriot Renault.
“Peugeot-Citroen deserves credit for taking costs out of its business, so its target to improve this by a further €1.1 billion in 2011 is credible, we believe,” said Citigroup Global Markets auto analyst Philip Watkins.
“But it is also clear that this all that stands in the way of a loss-making 2011 for the Auto business, with raw materials and pricing biting. We now see a modest contraction in 2011 Auto EBIT (earnings before interest and tax) of €50 million, with so many headwinds to deal with,” Watkins said.
Neil Winton – February 15, 2011