PSA Big Profit Jump Stuns Investors, But Is It Sustainable?
New Products Like Peugeot 3008, Citroen C3 Will Help.
PSA Group, a financial basket case not that long ago when it was called Peugeot, spurred euphoria amongst investors who described its latest performance as being more German premium manufacturer than plain-vanilla mass car maker.
“Getting close to premium auto margin at 6.8 per cent,” said Barclays Equity Research (BER). “Outstanding”, “breath-taking” and “more than you could ask for”, said Commerzbank. ”Peugeot deserves a gold star”, said Reuters Breaking Views.
PSA Group said net income more than doubled to €1.2 billion in the first half, up from €571 million a year ago. The auto division raised profit by a third to €1.3 billion, increasing the operating margin to 6.8 per cent from 5 per cent. PSA returned to the black last year after its strategy of freezing pay, cutting costs and expanding outside of Europe.
In April, CEO Carlos Tavares unveiled a new plan – “Push to Pass”, which called for a tripling by 2021 of the previous “Back in the Race” plan of a two per cent automotive profit margin by 2018. The plan called for 26 new cars, eight commercial vehicles and a pickup truck, as well as the 7 plug-in hybrids and 4 electric vehicles. In 2015, Peugeot-Citroen made a net profit of €1.2 billion, its first profit in three years, and compared with a loss of €555 million the previous year. Automotive operating profit was five per cent.
Overweight
BER said it continues its “overweight” portfolio rating on PSA and raised its automotive operating profit forecast for 2016 to €2.25 billion from €1.88 billion.
“The long-awaited product offensive is here and PSA should be able to capitalise on new products – the Peugeot 3008 and Citroen C3 in the fourth quarter and 2017 to turn back some market share losses in Europe. We also believe PSA is right where it should be in terms of future technologies with 7 plug-in hybrids and 4 EVs scheduled for 2019 to 2021, and best in class emissions performance for both CO2 and NOx,” said BER analyst Alexis Albert.
After its enthusiastic initial response, Commerzbank had some second thoughts about the jump in profitability to 6.8 per cent.
“This has been achieved by vigorous pricing discipline as well as substantial cost savings. The margin clearly surprised to the upside. However, we believe the level will not be sustainable as the second half is typically seasonally lower and PSA also launches more new cars, which should increase costs somewhat. Nevertheless, PSA’s level of profitability was unthinkable only three years ago,” Commerzbank analyst Sascha Gommel said.
Cost cutting
After awarding PSA a gold star, Reuters Breaking Views agreed that the profit boost had been achieved mainly by cost cutting, and warned that the expected radical shakeup in the industry because of robot cars, electric vehicles and new mobility services represented a big hurdle long-term.
“The group’s improving profitability is an important precondition for coping with the coming technological revolution. Yet investors should be aware that Peugeot’s real challenges go well beyond operating margins and quarterly sales,” said Breaking Views columnist Olaf Storbeck.
Citi Research analyst Michael Tyndall wondered if PSA’s profit performance was sustainable.
“More than 50 per cent of the improvement has come from fixed-cost savings, but in this regard the company is coy about how much opportunity is still on the table. Encouragingly, CEO Tavares has said there are more costs to come out and the 4 per cent margin target for 2016-2018 is a floor, but the absence of greater details leaves us wondering when the savings will run out,” Tyndall said.
Tyndall said production and procurement savings have totalled €6 billion in the past 9 years and wondered if this could continue as the model line-up is refreshed. Tyndall reckoned that 75 per cent of savings were from purchasing and were therefore sustainable.
“Margin sustainability is the issue,” Tyndall said.
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