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Peugeot’s Varin Outlines Vision, Underwhelms Investors

Questions About Euro Bias, Faurecia Remain Unanswered
Short-Term Profitability Improves, But Concerns Mount About 2010

Peugeot CEO Philippe Varin finally unburdened himself of his vision of the future at a meeting on November 12, but investors were not impressed.

Investors wanted guidance from Peugeot about his plans, with the main concerns being the company’s Eurocentricity, the low capacity use rates of its European factories, and possibly the sale of its Faurecia subsidiary.

In the event, Varin had some good short-term news, but not much to address the long-term concerns.

Varin, who took over from Christian Streiff last March, unveiled a three-year plan to boost margins by €3.3 billion with more cost cutting and increasing sales in emerging markets. This would raise profitability to the average level attained by companies like Volkswagen, Daimler, Honda, Fiat and Hyundai.

Varin also announced that Peugeot expects to break-even in the second half, as sales were helped by the Europe-wide car scrapping schemes.

After reporting first half results, the company said it expected to lose between €1 billion and €2 billion in 2009, but analysts now expect this to fall to about €800 million for the whole year. Peugeot recorded a net loss of €962 million in the first half, compared with a net profit of €733 million in the same period last year before the industry was engulfed in a sales crisis.

Fantasy visions
Bernstein Research analyst Max Warburton wasn’t phased by the lack of excitement generated by Varin’s vision, saying car companies which pushed “fantasy visions” rarely came up with the goods.

“Auto companies that pursue gradual, incremental progress tend to win in the end – like Toyota until 2007. Peugeot absolutely fits the Asian model – it is well run, intelligent, focussed company with a history of conservative management who chose to set long-term targets rather than issue stock market pleasing pronouncements,” Warburton said.

But some investors worried that the lack of restructuring action from Varin might be down to the hostage to fortune generated by the French government’s €3 billion loan earlier this year, and its publicly unspoken bar to shutting price French factories in favour of cheaper eastern European ones.

Warburton said the lack of notable action from Varin showed the long-term difficulties facing a company like Peugeot.

“The problem with Varin’s appraisal of Peugeot is that by avoiding any time line or detailed targets he is admitting that he sees few ways to escape the perpetual low margin struggle of European mass market car makers,” Warburton said.

Nomura International analyst Dorothee Cresswell was also underwhelmed.

Capacity cut restraints
“Management remains constrained by an already lean cost base and strong political resistance to capacity cuts,” Cresswell said.

She pointed to concerns about weakening markets next year and the difficulty of seeking to raise sales in emerging markets.

“European volumes are set to deteriorate as scrapping incentives run out and the competitive environment turns even more aggressive. Simultaneously, an ever increasing number of automakers are targeting the same emerging markets (as Peugeot) to realise their growth aspirations,” Cresswell said.

Bank of America Merrill Lynch shared in the disappointment, saying Varin’s words contained few new elements.

“We believe that investors hoped for answers to strategic issues the company is facing, notably its over-exposure to Europe. We learned very little so far on this,” Merrill Lynch said in a report.

Neil Winton – November 20, 2009

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