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Peugeot-Citroen’s Massive Losses Shake Investors

Are More Cuts Needed, Will Government Bailout Be Required?
Despite Dire Straits, Most Investors Believe Peugeot Will Hang On

“Something in the European auto industry has to give soon”

Peugeot-Citroen’s huge losses in 2012 raised fears among some investors that the company may be forced into making more cuts, or submit itself to a humiliating government bailout.  But some investors said the results were not as bad as feared, and expressed some faith in the company’s turnaround plan, even though it assumes improvements in European sales which are tenuous at best.

Peugeot-Citroen reported a massive net loss of €5.01 billion for 2012, compared with a net profit of €588 million in 2011. The bulk of the losses came from a multi-billion euro write-down announced a week earlier. The automotive division reported an operating loss of €1.5 billion for 2012, compared with a loss of €92 million a year earlier.

Commerzbank analyst Sascha Gommel said Peugeot-Citroen’s results were not as weak as he expected, but the company was in a mess.

“The outlined medium-term plan is based on aggressive underlying assumptions, in our view. Despite the slightly better result, Peugeot-Citroen remains in a dire state,” Gommel said.

After the results, Peugeot-Citroen CEO Philippe Varin said the company would move its products upmarket, and differentiate more between Peugeot and Citroen. He reiterated the plan to raise sales to more than 50 per cent outside of Europe by 2015, from 38 per cent in 2012.

The Wall Street Journal’s Heard on the Street column said despite €2 billion of asset sales in 2012 and a €1 billion rights offer, if Peugeot’s West European car sales assumptions  – three to five per cent down in 2013, then stabilising – turn out wrong, more closures and spending cuts might be needed.

Deutsche Bank analyst Gaetan Toulemonde described Peugeot-Citroen’s results as weak, but expected some improvement in operating profit and debt in 2013.

Max Warburton, analyst with Bernstein Research, said Peugeot-Citroen’s position was bad but still retrievable.

“Peugeot-Citroen’s figures were horrible, but it has a solid gross cash position of €5.4 billion, total resources of €10.6 billion including undrawn credit facilities and government support for its financial services borrowings,” Warburton said.

Warburton echoed the fear that the French government might step in if Peugeot-Citroen’s circumstances deteriorate, and pointed out that the overall situation in Europe was distinctly rocky.

“We interpret management’s commitment to ongoing heavy spending on product and technology as follows: they are confident Peugeot-Citroen will still exist in five year’s time. Whether it will exist in private or state ownership is another matter. A lot rests on other manufacturers decisions and liquidity in Europe – but something in the European auto industry has to give soon.

The Financial Times Lex column also had some sobering thoughts about Peugeot-Citroen’s future.

“First can Peugeot stay the course? The biggest risk has to be that that market in Europe declines more than the three to five per cent that management anticipates. Second, even if the company performs OK, is this an attractive investment opportunity? Peugeot shares are up more than 40 per cent over the past three months as investors have sensed a shift from intensive car to recuperation mode. But from here on, it looks to be a long, long road,” Lex said.

Neil Winton – February 20, 2013

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