Peugeot Impresses With Early Win Over Profit Goal.
Now Financial Health Restored, The Alliance Search Can Begin.
Long-term Worries Not Entirely Removed Though.
If Peugeot, Renault Can Do It, Why Can’t VW?
PSA Peugeot-Citroen wowed stock markets with strong profits in 2015 after years of massive losses, and even outshone another impressive performance from its compatriot Renault.
Standard & Poors expects 2016 to be a positive year as well for Peugeot-Citroen, but worries about over-dependency on Europe, the weak new product pipeline which won’t be helped by low R&D spending.
And investors were asking if the likes of Peugeot-Citroen and Renault could make profits of close to five per cent, why couldn’t Volkswagen do the same thing with its own brand?
Peugeot-Citroen was so pleased with its financial results, which achieved the so-called “Back in the Race” targets set in 2014 by CEO Carlos Tavares for 2018, that it was now ready to talk to other carmakers about alliance deals.
“We are very open to discuss and grow with external opportunities. We were not ready to discuss it when we were weak, but now we are back in the race we are ready to discuss,” CFO Jean-Baptiste de Chatillon told the Financial Times.
As Tavares visits potential alliance partners around the world, he is likely to bump into Fiat Chrysler Automobiles CEO Sergio Marchionne who has also expressed an interest in collaboration partnerships.
Peugeot was on the brink of bankruptcy a couple of years ago and was saved by a €3 billion state-backed rescue plan after racking up more than €7 billion in losses over a couple of years. France and Chinese carmaker Dongfeng each bought 14 per cent of the company. The Peugeot family stake was reduced to 14 per cent.
Lack of ambition
In 2014 Tavares set a two per cent profit margin goal for 2018, which at the time was ridiculed for being under-ambitious. The plan included cutting fixed costs of about €1 billion, shutting some capacity and insisted on cutting discounts on new car sales to bolster profit margins.
In 2015, Peugeot-Citroen posted a net profit of €1.2 billion, its first profit in three years, and compared with a loss of €555 million the previous year. Automotive operating profit was five per cent.
Earlier in the month Renault reported 2015 operating profit hit 5.1 per cent compared with 3.9 per cent in 2014.
Credit rating service Standard & Poors was impressed by Peugeot-Citroen’s performance and raised its rating to “BB”, with a positive outlook. But it did point out a couple of areas of doubt for Peugeot-Citroen’s future.
“Peugeot remains dependent on Europe, where it generates more than 60 per cent of its sales. The company’s European market shares have been declining since 2010 and may reduce further because the pipeline of new vehicles seems relatively weak. Additionally, Peugeot’s capital expenditures for research and development costs appear low relative to peers’ and may constrain future growth, despite Peugeot’s cooperation agreements with several automakers,” S&P said.
“Moreover, Peugeot keeps posting high restructuring expenses which reached €793 million in 2015, after €761 million in 2014 and €465 million in 2013,” S&P said.
For the time being though the outlook remains impressive.
“We believe the company can maintain high profitability over the coming year, despite an eroding revenue base. The outlook also factors in our view that Peugeot’s financial policy will likely remain prudent and, in particular, that the group will not use its sizeable cash position to finance larger acquisitions,” S&P said.
Investment researcher Evercore ISI didn’t share any of this caution.
Analyst Arndt Ellinghorst said the performance of both Peugeot and Renault raised serious questions about the VW brand, which even before the diesel crisis hardly reached two per cent profitability.
“We regard both French (manufacturers) as impressive and very credible “self-help” stories with strong execution and industry leading focus on efficiency. At a time when German (manufacturers) strategy appears to be “do more with more” – i.e. significant spending to keep growing – we find it very interesting to see the benefits from consequent focus on efficiency and price realisation start bearing fruit in France,” Ellinghorst said.
Peugeot-Citroen said it will publish a new growth plan on April 5.
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