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PSA Strong Profits Baffle Analysts

PSA Strong Profits Baffle Analysts.

“The volume growth at this company in recent years has been minimal. Yet PSA keeps growing margins”

Merger With Opel-Vauxhall Completed.

While VW was reassuring investors, Peugeot shareholders were probably a little confused, as first half profits looked too good to be true to some commentators who expect strong profit gains to reflect accelerating sales.

PSA Group reported a record automotive profit margin of 7.3 per cent in the first half compared with 6.8 per cent in the same period last year as net income rose 3.6 per cent to €1.26 billion. This was thanks to stronger pricing on vehicles like the Peugeot 3008 which more than made up for weaker sales in Europe and China.

PSA reiterated its more modest long term targets of a recurring operating profit margin of more than 4.5 per cent on average between 2016 and 2018 and above 6 per cent by 2021. Sales growth should be 10 per cent between 2015 and 2018, with an additional 15 per cent by 2021.

The Wall Street Journal’s Heard on the Street column was impressed by the latest numbers.

“Peugeot-maker PSA’s revival since its 2014 bailout is remarkable. It astonished the market with a first half adjusted operating margin of 7.3 per cent in the core automotive division, which lost over €1.6 billion as recently as 2013,” Street columnist Stephen Wilmot said.

“Investors are excited not just because of what this means for PSA’s existing business, which hasn’t grown much, but also because PSA is in the process of buying GM’s loss making European business Opel (and Vauxhall). Chief executive Carlos Tavares said Opel would be “an additional lever to reduce costs,” according to Wilmot.

“I have honestly never seen anything like this”
Bernstein Research analyst Max Warburton was almost beside himself.

“I have honestly never seen anything like this”, Warburton said in a report reacting to PSA’s results.

“We can all list the (manufacturers) turnarounds that have worked, but nearly all of them have involved big volume growth – driven by new products, and, typically, a helpful macro backdrop. But PSA is different. The volume growth at this company in recent years has been minimal. Yet PSA keeps growing margins,” Warburton said.

Investment bank Jefferies was a bit more restrained but echoed the Wall Street Journal’s reference to the imminent merger with GM’s Opel and Vauxhall, suggesting an acceleration of synergies between the two companies. Jefferies also pointed out that the current strong product mix will eventually fade.

Citi Research liked what it saw too, but had some questions to ask.

“It is hard to find fault with PSA’s recovery. Costs continue to come down, prices continue to go up and product mix has jumped higher. Churlish as it may seem we are scratching our heads as to how, given the improvement in margins is nothing short of remarkable,” Citi Research analyst Michael Tyndall said.

More to come
“Arguably there is more to come as PSA refreshes its product range, but we still believe expansion and renewal will require investment and that will cap margins at current levels. In addition there is the planned acquisition of GM Europe, which offers substantial opportunity for synergies, but at the same time offers a significant challenge in terms of integration,” Tyndall said.

Not everybody expects the merger to pay off big.

“The take-over of Opel, while adding significant potential, clearly deteriorates the risk profile. The dependence on a currently very robust European car market is significant,” said Macquarie Research analyst Christian Breitsprecher said.

On August 1, PSA said it completed the takeover of Opel/Vauxhall, about three months earlier than expected.

Bernstein’s Warburton said PSA is being run with zero-based budgeting, fearsome cost reduction and clever pricing.

“It is unlike anything this analyst has seen in his career. Can PSA start to grow too?” Warburton said.

“PSA will soon take control of Opel and will apply the same techniques there. The opportunity is big and we have confidence Opel can be fixed,” Warburton said.


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