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Peugeot Recovery Plan Called Unambitious, And Hard To Meet

Upmarket Attempt With DS Brand Will Meet German’s Head-on.
Some Think Tavares Deliberately Underselling To Please Investors Later.

“to reach their goals the road ahead will not be easy, particularly given the competition is fully geared up for the same race”.

Peugeot’s plan to return to profitability by slashing models and moving upmarket was called unambitious by investors, although even these low-hanging targets might be difficult to reach given the competitiveness of the European market.

New Peugeot CEO Carlos Tavares outlined the turnaround plan, labelled “Back in the Race”, which calls for a two per cent operating margin by 2018 rising to five per cent between 2019 and 2023. Tavares also targeted €2 billion of operating cash flow in total between 2016 and 2018. Peugeot lost more than €7 billion between 2012 and 2013.

Tavares will dump big cars, presumably the Peugeot 508 and Citroen C5 which have been huge money losers for years, and replace them with an attempt to move upmarket using the DS brand. This strategy didn’t meet with much support either.

Reuters’ BreakingViews columnist Olaf Storbeck thought this was a case of pleasing investors by offering low targets which might be easily beaten.

“His (Tavares) counsel of patience suggests that the problems are deep. But the new CEO may also want to put the bar artificially low for psychological reasons. Investors ultimately like it when companies under-promise and over-deliver,” Storbeck said.

Kristina Church, analyst with Barclays Equity Research, thought that Peugeot might not even meet the easy targets, and cast doubts on the plan to move upmarket, which would mean engaging with the established German premium players like BMW, Mercedes and Audi.

“We find it difficult to get excited, especially as these targets are clearly not overly ambitious. Beyond this, to reach their goals the road ahead will not be an easy one, particularly given the competition is fully geared up for the same race that (Peugeot) is competing in,” Church said.

Differentiating brands
“The plan to focus on differentiating brands has merit, but we question whether (Peugeot’s) strategy to expand their upmarket DS will succeed, particularly in an environment where premium players are launching smaller vehicles to help meet CO2 standards,” Church said.

Peugeot’s strategy of cutting capital spending doesn’t augur well.

“We continue to believe (Peugeot) is likely to get left behind in the content and therefore pricing stakes,” Church said.

Bernstein Research analyst Max Warburton at least thought the modest targets were makeable.

“The targets look very conservative and somewhat distant. Targeting two per cent margins in four years is a bit of a cold shower in an era when Renault has targeted five per cent, Ford Europe 5-6 per cent, VW six per cent and when Fiat is about to target the moon,” Warburton said.

“But we believe most will join us in concluding these targets are excessively conservative relative to peers – especially given Tavares’ previous claim that (Peugeot) was already profitable in Europe in the early months of 2014 and the growing evidence of a European volume recovery,” Warburton said.

Commerzbank Equity Research liked the plan and recommended investors buy Peugeot shares.

“Nevertheless (given the unambitious targets), the turnaround story remains fully intact and we confirm our “Buy” rating,” said Commerzbank analyst Sascha Gommel.

The Financial Times Lex column went for the under-selling argument, but worried that this might reflect a lack of growth potential for Peugeot.

“But Peugeot may yet surprise. Nearly halving the number of models could shrink revenues, but would also help Peugeot focus on its most profitable segments. On the other hand, with capacity utilisation in European plants so low – just two-thirds last year – even a small improvement in production volumes cold have an inordinately positive impact as costs per unit fall quickly,” Lex said.

Will Peugeot survive?
Lex asked itself will Peugeot survive.

“Yes. The test drive of Peugeot’s strategy had already begun; now management needs to get it into gear,” Lex said.

Barclays’ Church was much more gloomy.

“Were the competition standing still, we might be able to say that his was a race that (Peugeot) has a chance in. But with a combination of relatively conservative targets, a long-dated time horizon, and an apparent lack of consideration for the evolution of an increasingly competitive landscape, we feel the market was left with little to get excited about,” Church said.  a

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