Reliance On Europe Will Also Help For A While.
“Survival looks achievable for Peugeot, prosperity remains a ways off”
Peugeot-Citroen has some admirers among investors, not least because it is perceived as not being able to get much worse.
Peugeot-Citroen surprised markets with its first half financial performance, when its automotive losses shrank to €510 million, almost €150 million better compared with the same period of 2012. The automotive division had been expected to lose about €740 million in the first half, and about the same again in the second half of 2013. Peugeot-Citroen burned through €3 billion in cash in 2012, pledged to halve that in 2013 and become cash neutral by the end of 2014. But in the first half of 2013 it generated about €203 million in cash, thanks largely to slashing capital spending by close to €740 billion, higher earnings and asset sales.
Morgan Stanley likes these measures. And ironically, Peugeot-Citroen’s heavily criticised over-reliance on Europe might soon turn out to be a benefit for a while as sales there rally.
“We believe cost and inventory discipline, paired with the highest E.U. exposure in the sector, will allow Peugeot-Citroen to keep surprising on free cash flow, which we think could break even as soon as next year,” said Morgan Stanley analyst Laura Lembke.
Long-term structural concerns
Most analysts’ projection for Peugeot-Citroen cash flow next year range from minus €700 million to minus €1 billion.
Morgan Stanley still has what it calls long-term structural concerns about Peugeot-Citroen, and prefers to own Renault shares.
“In contrast, Renault’s high emerging market exposure and already elevated inventory levels make it vulnerable to a further slowdown in the near term. But a superior balance sheet, free cash flow generation, profitable international business and already downsized French industrial footprint mean we keep our clear preference for Renault over Peugeot-Citroen longer-term,” Lembke said.
The Wall Street Journal’s Heard on the Street column though has some cautionary words about Peugeot-Citroen, and points out that if it needs to become more aggressive in its cost-cutting, the French government might call a halt.
“While survival looks more achievable for Peugeot, prosperity remains a ways off. The outlook for its core auto business is still unconvincing. Even on optimistic forecasts the division may stop making losses only in 2015, according to (investment bank) UBS,” the column’s Andrew Peaple said.
“Further job losses to turn around Peugeot’s low plant utilization in France would, meanwhile, likely rile the Paris government,” Peaple said.
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