PSA Of France Overtakes BMW, Mercedes In Profit Race.
“Teaming up with Fiat Chrysler Automobiles (FCA) or Jaguar Land Rover would give the cost-cutter more fat to trim”
France’s PSA Group continues to astonish investors as it produces German style premium sector profit margins from its solid, worthy mass-market cars and SUVs, and they want the company to aggressively seek takeover candidates to work its magic and make big profits.
Not only is PSA now making more money than the likes of BMW and Mercedes, it is doing it at a time when global markets are fragile, and its competitors moan about the harsh CO2 regulatory regime in Europe.
Investors in General Motors too must looking on in blinking disbelief, as PSA even makes money from GM Europe’s old profit nemesis Opel and Vauxhall. It’s hard to believe that when PSA took over these two companies in 2017, they had notched up losses of about $20 billion over the first years of the 21st century.
PSA is now so revered by investors and experts, that they are urging it, and CEO Carlos Tavares, to quickly take over struggling companies like Fiat Chrysler Automobiles (at least struggling with European losses) or Tata Motors of India’s loss-making Jaguar Land Rover, and turn them around.
“The 20 billion euro ($22.3 billion) French carmaker’s chief executive has rescued Opel Vauxhall faster than seemed possible when he bought the struggling General Motors business in 2017. But the group now looks about as lean as it can get, and the automotive market is slowing. Teaming up with Fiat Chrysler Automobiles (FCA) or Jaguar Land Rover would give the cost-cutter more fat to trim,” said Reuter’s BreakingViews columnist Liam Proud.
PSA, which sells Peugeot, Citroen, DS, Opel and Vauxhall branded vehicles, had been favored to merge with FCA until Renault-Nissan stepped in. When that deal crashed and burned, somehow investors lost interest in pursuing a deal. And Tata has vigorously denied it would sell JLR.
Only twice a year
In the first half, PSA Group reported an operating margin of 8.7% and 2.36 billion euros ($2.6 billion) of EBIT (earnings before interest and tax), while group recurring income jumped 10.6% to 3.4 billion euros ($3.8 billion), compared with the same period of 2018. French companies only report profits every half-year.
Investment researcher Evercore ISI was mightily impressed too.
“PSA delivered a truly outstanding 8.7% 1st half EBIT margin while Renault and the VW brand are expected to deliver about 4% in the mass market, and premium Daimler/BMW are expected to deliver 5 to 7%. Who is premium and who is the mass-market?” said Evercore ISI analyst Arndt Ellinghorst.
Citi Research analyst Raghav Gupta-Chaudhary reckoned PSA had insured itself against future hurdles.
“The auto margin of 8.7% is sector leading, and, with the company stating it can improve pricing further, we are confident that this, and the cost-efficiency drive, should provide a buffer to headwinds,” Gupta-Chaudhary said.
“We are bullish on PSA’s ability to maintain its best-in-class execution. The business continues to generate significant cash flow, and we believe is well-placed to meet the upcoming fuel-efficiency targets in Europe. Only time will tell how much margin pain (manufacturers) will need to absorb in order to sell the required number of vehicles to meet the CO2 targets. The fact that PSA needs only sell 7% of (electric vehicles) in 2020 gives us some comfort about its earnings prospects. Its disciplined approach to capital allocation should not go unnoticed, and we believe shareholders will be rewarded via distributions if it cannot secure an attractive deal. We remain Buyers (of the shares),” Gupta-Chaudhary said.
Breaking Views’ Proud said there are only small amounts of cost savings now available at PSA, so Tavares should look outside PSA to make deals and money.
“The remaining savings (at PSA) are tiny compared with the rewards on offer from further deal-making. The obvious candidates are Fiat Chrysler and Jaguar Land Rover, which are either looking for a partner, or in need of one,” Proud said.
“Automotive deal-making is tough. Politicians often meddle to protect jobs, and controlling shareholders, like Fiat’s Agnelli family, or Jaguar Land Rover’s Tata Motors, need to be carefully wooed. Yet the rewards on offer mean Tavares should make M&A his priority,” Proud said.