PSA Impresses Investors With New Product Plans.
Strong Profits Look Set To Continue.
But DS Project Under A Cloud.
“At the risk of sounding harsh we wonder why PSA is persisting with the DS brand”
PSA Group has scored rave reviews from investors because of its recovery from a near death experience.
It has turned doubters into believers by bravely defying convention to restore profit margins while resisting the short-term but doomed tactic of over-production to increase sales, which gives a brief but doomed sheen to the balance sheet. It resisted the temptation to stack ‘em high and sell ‘em cheap.
Its purchase of serial loss maker Opel-Vauxhall was greeted with derision at first, but by presenting its philosophy of firm price discipline and improved efficiency, investors now see this seemingly impossible task of returning it to profitability as possible.
Given all this strength of character and realism, why then does it pursue the apparently doomed project of creating a “premium” brand DS?
According to investment researcher Evercore ISI, DS brand has struggled, with sales falling from under 120,000 in 2014 to about 63,000 in 2017.
“PSA is targeting 273,000 in 2021, with sales boosted by a major rollout of new products. We think PSA may struggle to meet this target unless the DS brand can take off significantly in China, however this will be a tall order given the pricing pressure the Chinese market is currently facing and the reluctance PSA has to cut prices or offer incentives,” Evercore ISI analyst Arndt Ellinghorst said.
But PSA’s future looks strong, despite this DS blind alley.
PSA briefed investors on its product plans and they came away impressed.
Margins to remain strong
“The company showcased a number of new models and we were particularly impressed with the perceived quality, which was high for a mass market (manufacturer). If the new models can mirror the success of the 3008/C3 launches with respect to upper trim mix we expect auto margins to remain strong and may even see growth beyond the current high of 7.3% in the first half of 2017, although fiscal 2017 is likely to come in slightly lower due to seasonality,” Ellinghorst said.
Evercore ISI forecasts a 7.1% auto EBIT (earnings before interest and tax) for 2017.
Citi Research has a similar view on PSA and its persistence with the DS project.
“At the risk of sounding harsh we wonder why PSA is persisting with the DS brand given the assumed high level of investment needed to take on the big three Germans,” Citi Research analyst Michael Tyndall said.
As for general prospects, Tyndall’s response to the new product plans was less than enthusiastic.
“Details were sparse. We have no idea if the new cars are cheaper to produce and in most cases no clue as to future price ambitions. In terms of spending it would seem the spate of new products will require a rise in investment but details here were also absent. To our minds the product story at PSA is currently overshadowed by the forthcoming restructuring and integration of Opel/Vauxhall. Given the uncertainty in that regard and our belief there may be some pain ahead we remain Neutral,” Tyndall said.
Tyndall thought the new Peugeot 208 looks like a winner.
Evercore ISI was more hopeful about Opel-Vauxhall prospects.
“We fell that expectations are high and largely priced in (to the share price) for a successful Opel turnaround and execution risk must be accounted for,” Ellinghorst said.
Ellinghorst also liked PSA’s electric plans which included battery (BEV) or plug-in hybrid versions of 86% of all models by 2023. The 208 will the first BEV in September 2019.
Various PSA policy wrinkles appeared in September. Development chief Gilles Le Borge told Automotive News much of Opel’s engine development will come to an end over the next few years. CEO Carlos Tavares said the next generation of PSA vehicles will meet U.S. regulations, adding that 3 years from now it could in theory go back to the U.S.
Meanwhile PSA will present its Opel/Vauxhall restructuring plan in November.