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Peugeot Costs Negating Impact Of Impressive New Cars

Despite Factories Producing At 100 Per Cent, Bottom Line Deteriorates
Painful Cost Cutting Required, Probably After The Election

Peugeot-Citroen’s stock price took a beating when it announced back in July lower half year profits and predicted a loss for its auto division, and UBS Investment Research believes that despite some impressive new cars, the company seems unable to transmit this to the bottom line.

Economic worries won’t help. Painful cost cutting is needed to restore profitability. The French election means early action is unlikely.

“Although the mix benefit from Peugeot’s model cycle is clear at the revenue level, it has failed to translate into incremental EBIT. While most drivers are supportive – strong product cycle and high utilisation rate – margins disappoint. Macro outlook raises the risk of further deterioration,” said UBS auto analyst David Lesne.

Peugeot-Citroen’s 2011 first half recurring operating income slipped to €405 million from €525 million in the same period of 2010. The company warned that it would take a €300 million hit in the second half because of the Japan earthquake and tsunami impact, as well as raw material price increases. Peugeot-Citroen predicted its auto division would make an €84 million loss in the second half.

UBS’s Lesne doesn’t think the auto division will do quite that badly, predicting a €45 million loss in the second half, but he believes that despite its admirable new vehicles, Peugeot-Citroen profit goals won’t be met, and tough and expensive decisions need to be taken

“We think Peugeot’s ambition to close the six per cent margin gap with competitors appears out of reach. A more achievable target would be to return to the margin levels of the early 2000s or around 4.5 per cent. On that basis Peugeot needs to achieve a €1.3 billion reduction in its annual fixed cost base, leading to a restructuring charge in excess of €2 billion,” Lesne said.

The recent stock price dive has taken this into account, he said. The upcoming election in France in May next year means any action is likely to be delayed past this date.

“The disappointing profitability of Peugeot auto division at a time when product mix is relatively positive and plans are running at full capacity utilisation highlights, in our view, the need for more structural adjustments to the division’s fixed cost base,” said Lesne.

Neil Winton – September 5, 2011

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