Peugeot Warns About Profits As Price Pressures Mount

“It seems strange that PSA is facing such pricing pressure as it has one of the freshest model line-ups in the European sector”

“Is the European market so weak that manufacturers are better off selling old cars than new product”

While VW wallowed in praise for its financial achievements in the third quarter, the rest were under pressure, not least PSA Peugeot-Citroen of France which inspired the headline “road to ruin” in the Financial Times.

Peugeot, and its Renault compatriot, only report profits after six months and a year, but PSA startled investors with another ominous profit warning while the rest were reporting results for the third quarter. The company said its automotive division would only break-even for the full year, implying a loss of €400 million in the second half of 2011, according to Commerzbank analyst Sascha Gommel.

This was PSA’s second profit warning in three months, and the FT’s Lex column didn’t pull its punches with the headline “PSA Peugeot Citroen: road to ruin”.

Lex said the auto division’s earnings, which account for about two-thirds of PSA revenues, will fall to zero in 2011, because of the fallout from the Japanese disasters, and its 60 per cent exposure to the stagnating western European market.

“All of this leaves the company terribly exposed to another economic downturn. Management knows that something must be done, and it has commenced an €800 million cost-cutting programme. But given that Peugeot has already made €2.6 billion worth of cuts over the past three years and will still only break even in 2011, the impact of another €800 million is debatable,” Lex said.

Many investment banks echoed this concern.

Severe strategic challenges
“PSA has severe strategic challenges that will at the very least take time to overcome. The message of the last two years has been that for all the performance plan savings the company has implemented, auto operating margins have not shifted materially, mainly because the company has not had the pricing to offset external headwinds consistently larger than expected,” said J.P.Morgan analyst Ranjit Unnithan.

Things aren’t likely to improve either.

“The key reason is a deterioration in pricing in Europe –  a trend that we believe will only become more acute during 2012 as European volumes are forecast to fall by three per cent – particularly affecting France and Southern Europe,” said Erich Hauser of Credit Suisse.

“There are few reasons to assume auto profits in 2012,” Hauser said.

Any new and swingeing cost cutting plan is unlikely to be introduced until after the French Presidential election in May next year.

Failed to reap benefits
Commerzbank’s Gommel said he had cut PSA’s earnings estimates by 30 per cent for 2011 and 20 per cent for 2012, and pointed out how puzzling it was that Peugeot had launched many new cars, but hadn’t been able to reap a financial benefit.

“We have been positive on PSA in the past as we believed that a strong product mix as well as improvements on the cost side would allow for better margins in the Automotive division. While we do not rule this out in general we believe it will take much longer than anticipated,” Gommel said.

Bernstein Research analyst Max Warburton wondered if Peugeot’s problems were a signal to other manufacturers, or if this was PSA specific.

“The key question is whether this is a clear warning sign that the European consumer has gone on strike and all manufacturers are having to surrender pricing or whether there is something specific at PSA that means they are taking more pain than the others. In our recent conversations with other manufacturers they seem slightly less concerned about pricing than PSA, but such bravado may prove short lived,” Warburton said.

Why hadn’t Peugeot’s new cars paid dividends?

“It seems strange that PSA is facing such pricing pressure as it has one of the freshest model line-ups in the European sector. With the new C3, new C4, new Peugeot 508 and DS models, it should be in a sweet spot. This is in stark contrast to the ageing model line-up at Renault and lack of product at Fiat – facelifts rather than real new models at VW. Is the European market so weak that manufacturers are better off selling old cars than new product,” said Warburton.

Neil Winton – November 3, 2011