PSA Of France’s Profits Spotlight Ford Europe, Fiat Weakness.
“We struggle to see reported margins as indicative of the true strength of OV’s turnaround”
France’s PSA Group is making money again and putting huge pressure on laggards like Ford Europe and Fiat, which could force them into take some hard decisions including withdrawal from the market, restructuring, or seeking a merger, according to analysts.
There is an aspect to PSA’s recovery – it almost fell into bankruptcy 5 years ago – which will send frissons of embarrassment through the management team at General Motors and maybe Ford too. Included in PSA’s latest financial report was news perennial value cruncher Opel Vauxhall, which lost about $20 billion this century while under the stewardship of GM and was bought last year by PSA, has apparently turned a profit already.
Ford might also start to wonder why its European subsidiary is barely in the black while PSA in the same mass car market can turn a profit. Rumors suggest Ford’s latest long-term reconstruction plan might have something radical in mind for Ford Europe.
While the competition reported disappointing results or warned that there are tough times ahead, PSA, which sells mass-market Peugeots, Citroens, Opels and Vauxhalls and has premium pretensions with its DS brand, is doing so well, analysts wonder if it might step in and bailout strugglers like Ford Europe and FCA’s Fiat and their small car operations.
Investors are suggesting PSA’s ability to make money from selling small cars might even persuade Ford and Fiat to withdraw from this sector. Others wonder about the possibility of PSA taking a stake in Ford’s Latin American operations. This would suit PSA because its sales are currently overwhelmingly European, and this would play to its global aspirations. PSA has long-term ambitions to return to the U.S.
PSA Group first half profits soared more than 40% and included a barely believable almost $600 million contribution from Opel-Vauxhall, although there some questions about just how this number was calculated.
Opel Vauxhall earned €502 million ($571 million) in the first half, compared with a loss of €179 million ($200 million) in the last 5 months of 2017. That profit for Opel Vauxhall came after some fancy accounting with €209 million from writing up the value of the acquired Opel business through so-called purchase price accounting. Higher prices, added almost €170 million, but the profit after all this was still close to 3%.
Meanwhile PSA’s operating profit rose 41% in the first half to €3 billion ($3.4 billion) compared with the same period last year, on sales 40% higher at €38.6 billion ($44 billion).
Investment researcher Jefferies said PSA’s performance was all the more impressive as it coincided with profit warnings from GM, Ford and Fiat Chrysler, while Daimler reported disappointing results. Renault Nissan worried about rising costs. Even Hyundai said upcoming demand might be weak. PSA’s turnaround skills may well be much coveted as other mass carmakers flounder.
“With OV (Opel Vauxhall) on track, management seems open to redeploying capital on projects that would leverage PSA’s skills. This is an open field, which in our view could go from working with Ford or Fiat on B (small) segment cars at risk of being discontinued to merging operations with Ford in Latam (Latin America),” Jefferies analyst Philippe Houchois said.
Houchois said the second half of 2018 will as usual be weaker than the first half, while Opel Vauxhall will see smaller progress on net pricing, and lower production to reduce stocks. There will be some help from new products and the ongoing headcount reduction.
Professor Ferdinand Dudenhoeffer, automotive expert at the University of Duisburg-Essen in Germany, said PSA’s automotive margin in the first half was 8.3%, 2nd to VW subsidiary Skoda’s 9.0% while languishing at the bottom was Ford Europe barely in the black with 0.3%.
Dudenhoeffer said PSA has tackled the problem of profitability by increasing its volume with the acquisition of Opel Vauxhall and cutting costs. Ford’s much lower sales makes it hard for it to bring new models to the market efficiently because it has much lower volume to spread out costs. FCA’s Fiat and its Alfa Romeo subsidiary have the same problem.
“Fiat Alfa and Ford Europe sold 816,000 and 900,000 new cars in the first half. In the new, tight competitive environment with PSA Opel and VW, SEAT (another VW subsidiary) and Skoda, this is causing a structural problem. The development costs are simply too high. A solution would be for a merger of the two (Fiat Alfa and Ford Europe),” Dudenhoeffer said.
PSA’s Peugeot, Citroen, DS and Opel Vauxhall sold just over 2 million vehicles in the first half.
Bernstein Research analyst Max Warburton described PSA’s results as “immense”, saying he had already seen Opel Vauxhall responding to CEO Carlos Tavares treatment.
“But these numbers exceeded our wildest dreams,” Warburton said.
Opel Vauxhall’s operating margin was 5%. After the takeover last year, PSA set Opel Vauxhall a 2% operating margin target for 2020, to be tripled by 2026.
“OV (Opel Vauxhall) just smashed its 2020 FCF (free cash flow) target and almost hit its 2026 margin target,” Warburton said.
“The (OV) brands are very weak. Much scepticism remains about PSA’s ability to fix it. But these numbers must surely silence the doubters – PSA has “fixed” OV in less than 12 months. These results should, by rights, drive a fundamental rethink of the OV deal, the value of the business and of the future of PSA. Consensus forecasts are way too low and the stock far too cheap,” Warburton said.
Berenberg Bank of Hamburg, Germany wasn’t convinced by Opel Vauxhall’s return to the black.
“We struggle to see reported margins as indicative of the true strength of OV’s turnaround,” said Berenberg analyst Alexander Haissl, who rates PSA a “sell”.
PSA’s Tavares has set about cutting costs at Opel Vauxhall, which had spiralled out of control under GM’s leadership. Tavares stopped Opel Vauxhall from continuing the process which ruined its finances; using cut price sales to dump unsold cars on rental outlets and fleets to keep production lines running and economic, but destroying residual values and profit margins in the process.
When Tavares took the helm at PSA in 2013 the company was reeling from the financial crisis and losing huge amounts of money, not least by using the same methods that brought down Opel Vauxhall. Tavares stopped all that and actually limited production to keep prices and margins safe. Tavares slashed capital spending budgets, and used limited funds to give new SUVs brash, superficial, good looks inside and out.
Peugeot was on the brink of bankruptcy and was saved by a €3 billion ($3.6 billion) state-backed rescue plan after racking up more than €7 billion ($8.3 billion) in losses over a couple of years. France and Chinese carmaker Dongfeng each bought 14% of the company. The Peugeot family stake was reduced to 14%.
Dudenhoeffer said the half year results from European volume manufacturers show that after the takeover of Opel Vauxhall by PSA, what he called a “new vacuum” has emerged and highlights a structural problem.
“Anyone travelling in the volume business with insufficient sales per model must expect a small margin or slipping into losses. That was for decades the problem for GM with Opel Vauxhall. Opels and Vauxhalls were designed almost exclusively for Europe. Thus, the development costs, compared with VW or Renault were too high. The PSA boss Tavares has solved the problem. Ford Dearborn has to find a solution, as does the new Fiat-Chrysler boss Michael Manley,” Dudenhoeffer said.