Ailing Peugeot’s Results Surprise, But Sustainability Questioned
Lack Of Scale Inhibits Competitive Edge, Move Upmarket Doubted Too.
“Capital spending was unsustainable, and if Peugeot was to move upmarket this implied higher, not lower spending”
Peugeot profits 2014 Sustainability
Peugeot is arguably Europe’s most financially troubled mass car manufacturer, but its half-year results convinced some investors that happy days are here again.
Some investors, that is.
Peugeot surprised investors with a cut in losses to €114 million in the first half of 2014 from €471 million in the same period of 2013, as operating cash flow jumped to €1.67 million from €471 million. The auto division made a €7 million half year operating profit after a whopping loss of €538 million in the same period of 2013. (French companies only report profits every half year, not quarterly).
Peugeot lost more than €7 billion between 2012 and 2013. Family owned Peugeot needed bailing out and it persuaded the French state and Dongfeng Motor of China to take 14 per cent stakes in the company. The deal diluted the Peugeot family stake to 14 per cent also, from 25.3 per cent.
The company appointed a new CEO, Carlos Tavares, who authored a turnaround plan called “Back in the Race”. This calls for a two per cent operating profit margin by 2018 rising to five per cent between 2019 and 2023, the dumping of uneconomic models, and an attempt to move upmarket using the DS brand.
The results for the first half of the year surprised International Strategy and Investment analyst Arndt Ellinghorst, who said Peugeot was performing well ahead of its game plan. He did raise an eyebrow slightly though.
“We wonder whether this can be sustained and the fact that there is still no net income probably means that Peugeot shares remain a stock not suitable for everyone. Still – stocks go where earnings go. In this case up,” Ellinghorst said.
Citi Research said Peugeot’s move upmarket was bearing fruit, and sensed a “cautious if relatively confident tone” on future prospects.
Even the usually cautious Max Warburton of Bernstein Research was impressed, saying Peugeot’s recovery was well on track to meet Tavares’ cautious mid-term guidance.
“……. But this stock has earnings momentum and surely has further recovery potential. So let’s raise the bar, and our cups to the stars,” Warburton said.
Barclays Equity Research wasn’t convinced that all was rosy. It didn’t think the company could repeat is tasty cash flow figures, and said the “long, hard road to recovery” efforts so far were often one-offs and might be reversed in the second half of the year. The cut in capital spending was unsustainable, and if Peugeot was seriously going to move upmarket this implied higher, not lower spending.
“In our view, (Peugeot’s) lack of scale will mean that they can never be competitive against either the Renault-Nissan Alliance or increasingly also the Fiat Chrysler Automobile group. A push upmarket sets them against the engineering and brand expertise of VW and European consumers are clearly showing their current preference for low-cost, low-content, low-snobbery factors brands like (Renault’s) Dacia, to which Peugeot has no competitor,” Barclays said in a report.