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Peugeot In Trouble, But Long-Term Prospects Stable

Change Of Government Makes Output Cuts Problematical
French Parliamentary Elections May Show Where Policy Is Going

Peugeot-Citroen shares have slid over the last three months from about €14 to about €8.5 as investors reckoned that long-discussed plans to cut unprofitable production wouldn’t survive the Presidential election.

Not that there was any great belief that a win for Nicolas Sarkozy would have given the company carte-blanche to cut unwanted factories. Former President Sarkozy summoned Peugeot CEO Philippe Varin to the Elysee Palace before the election after union calls to protect jobs, but any promises made didn’t survive the May 6 vote. France’s new President Francois Hollande hasn’t made any specific threats to companies which fire workers to cut costs, but before the election he made menacing noises about not being happy about “a parade of firings” that were postponed ahead of the election.

“The day after the election, before irrevocable decisions are taken, I will have to intervene,” Hollande said on the France 2 TV station. So far, no action, but Peugeot’s hints before the election that it will close the Aulnay plant after 2014, might never materialise. The Aulnay plant north of Paris makes the Citroen C3 and employs about 3,300. Meanwhile, Holland’s Socialist party’s performance in next month’s French Parliamentary elections will give more of a clue about his power to radically change policy.

Investment bankers are pointing to large losses for Peugeot this year, but still expect the company to weather the storm.

J.P.Morgan has raised its loss estimate for Peugeot’s automotive operations in 2012 to €633 million from a previous expectation of €615 million, on an earnings before interest and tax basis (EBIT). Last year the automotive division lost €92 million.

In the first quarter of 2012, PSA Peugeot-Citroen’s automotive division saw sales dive 14 per cent to €9.72 billion. Like Renault, it only reveals earnings every six months. In 2012, Peugeot Citroen has sold its headquarters building, sold new shares, stepped up its cost cutting programme and joined General Motors in an alliance. GM bought a seven per cent stake in Peugeot-Citroen.

Enough money to act alone
UBS Investment Research said Peugeot has called for unspecified but coordinated capacity cuts by European auto manufacturers to ensure sustainability, reckoning that its excess capacity is around 25 per cent. But UBS said Peugeot has enough money to act alone if no collective solution happens.

Some investors are worried about a build up in stocks as Peugeot-Citroen sales weaken, are not happy with the amount of disclosure the company is providing, and say a wait-and-see policy makes sense.

“We believe that investors are better off waiting to see how the first half of 2012 turns out and how the outlook develops into the second half before committing to Peugeot-Citroen,” said Credit Suisse analyst Eric Hauser, in a report issued before the presidential election.

Deutsche Bank expects that sales of the recently launched Peugeot 208 and results of cost savings will boost the second half performance. Deutsche Bank hopes Peugeot has reached a trough, but still faces tough conditions.

“If the auto division recovers in the second half , with operating profit of the auto division at breakeven and limited cash burn, this is still not enough to generate a positive net result and a positive free cash flow. Therefore, the magnitude of the recovery relies on the European car market recovery in 2013 and beyond,” said Deutsche Bank analyst Gaetan Toulemonde.

Neil Winton – May 15, 2012

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