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Renault Expected To Build On Improved Profit Performance

When Model Sweet Spot Arrives, Expect Profit Surge.
Share Price Dive Seen As Opportunity To Buy More.
Russia, Emerging Markets Though Cause For Concern.

Renault’s strong financial performance in the first half won’t have surprised those keeping track of its impressive sales growth in Europe, and investors expect profits to continue growing despite the ominous developments in Russia.

Renault Profit Performance 2014

Renault improved earnings before interest and taxes (EBIT) to €729 million in the first six months of 2014 from €583 million in the same period of 2013. (French companies only report profits every six months, not quarterly). The operating margin rose to 3.7 per cent from 2.9 per cent. Renault cited cost-cutting as the main reason for its improved profitability, despite foreign currency problems and mounting stocks.

Sales of its new Captur compact SUV and its Dacia cut-price subsidiary helped too. In the first half Renault raised its market share in Western Europe to 9.5 per cent from 8.5 per cent in the same period of 2013. Sales rose 18.4 per cent to 608,933 according to the European Car Manufacturers Association. The Renault brand accounted for 445,137 of that improved total while the Dacia contributed 163,796, up 32.8 per cent.

Barclays Equity Research was impressed, and expects the earnings improvement to continue.

“We believe Renault’s strong European sales, in a period when product is not at a sweet spot, highlights the success of the company’s entry-level products, but also future potential as traditional, Renault-badged vehicles are renewed,” said Barclays analyst Kristina Church.

Church said new Renaults being launched on a new platform – 11 new ones by 2020 – will total 1.6 million and make big efficiency savings. For the last three years net Monokuzuri (alliance) savings ran at €600 million a year. This should rise to €700 million a year in 2015 with the launch of the new Espace, mid-size SUV and Megane.

On the negative side, Church said investors are nervous about Renault exposure to emerging markets, and Russia in particular.

“Russia is currently only eight per cent of sales but with AvtoVaz near consolidation, this figure is set to rise to about 23 per cent,” Church said.

Despite this good news, Renault shares took a mighty, 20 per cent hit on the Paris Stock Exchange in the week after the results were announced, as investors worried about Russia, and other emerging markets.

Citi Research analyst Philip Watkins was unfazed by the stock’s performance, saying this simply gave new investors in Renault a chance to get in at a cheaper price to buy. Watkins also said some investors were worried about negative cash flow in the first half because of lower sales to dealers and higher stocks.

Hold On
Commerzbank analyst Sascha Gommel cut his operating income estimates to €1.5 billion for 2014 and €2.1 billion for 2015 because of Russia and Latin America, but retained his “hold” rating on Renault shares.

Bernstein Research analyst Max Warburton wasn’t impressed though, saying core Renault sales, with the exception of the Captur, were weak.

“We’re not convinced the French and broader European love affair with Dacia will be enough to offset this emerging markets slowdown and deliver much more than mediocre second half and 2015 performance. We find it hard to muster much enthusiasm for the stock or the story at present,” Warburton said.

Morgan Stanley analyst Laura Lembke sees things differently.

“Renault is structurally in a far stronger position than its mass market peers. Renault can rely on earnings, R&D and now also production support from Nissan, the sector’s highest return financial services business, a leading position in the entry segment with Dacia and the second-lowest labour costs globally,” Lembke said.

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