Peugeot-Citroen Stuns With Stellar Profit Performance

Peugeot-Citroen Stuns With Stellar Profit Performance.

“the company could teach BMW how to cut fixed and variable costs”

Investment banks were throwing away their unambitious forecasts for PSA Peugeot-Citroen after the company shocked markets with stonking profits.

The company made a profit in the first half (French companies only report profits, or losses, for the half year) for the first time since 2011. Net profit soared to €571 million in the first half compared with a loss of €114 million in the same period last year including a profit margin of five per cent, two percentage points more than experts were expecting.

Company chairman Carlos Tavares’ “Back in the Race” recovery plan for 2014-2018 promised a two per cent profit margin by 2018. The plan also involves the cutting of inventory, production costs and the company’s model range from 45 to 26 models by 2022.

Peugeot-Citroen made an operating profit of just €63 million in 2014 following a €1.04 billion loss in 2013. The company’s overall net loss shrunk to €555 million from €2.23 billion. Peugeot-Citroen has said between 2019 and 2023, all products would have a five per cent target margin.

Last year 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.

Commerzbank analyst Sascha Gommel dumped his profit estimate for 2015.

“We now assume 2015 EBIT (earnings before interest and tax) of €2.5 billion, up from (a previous estimate of) €2.0 billion and 2016 EBIT of €3.1 billion,” Gommel said.

Gommel had previously estimated 2016 EBIT of €2.6 billion.

“This has been driven by higher assumptions for the automotive division. We expect the second half to be seasonally weaker, with a 3.5 per cent automotive margin. For 2016, we expect the company to generate an automotive margin of 5.2 per cent,” he said.

Bernstein Research analyst Max Warburton isn’t prepared to raise his forecast for 2016 to five per cent yet, but called the results “truly extraordinary for a company that just 24 months ago was losing money and in financial distress.”

Warburton was not lost for words to describe Peugeot-Citroen’s achievement.

Split atom, walk on the moon
“For a Euro-centric automaker in 2015, it’s fabulous. For those who slog and toil for a living in the European mass market, they would place it alongside splitting the atom, walking on the moon and mapping the human genome as a pinnacle of human endeavour,” Warburton said.

“How can little (Peugeot-Citroen) – near death until just recently, constrained by making small cars in Europe and burdened by French labour costs, make this kind of margin? How did the business turnaround so quickly,” Warburton asked.

Warburton didn’t venture an answer, and he did find some negatives to worry about. The company didn’t raise its financial targets for the rest of 2015. Warburton also pointed to the lack of new models, which will be underlined in France by Renault’s new Kadjar SUV, Megane saloon and Scenic MPV. He said China looked “troublesome”.

Refreshing
Evercore ISI analyst Arndt Ellinghorst did venture an explanation for the rapid Peugeot-Citroen turnaround. He said the company could even teach BMW and German premium manufacturers how to cut fixed and variable costs. The improvement was based on financial performance rather than market share.

“It is refreshing to see that this is possible in the (vehicle manufacturing) business,” Ellinghorst said.