Some Investors Applaud Cost Savings, Pricing Improvements.
Others Point To Over Production, Danger If Markets Deteriorate.
“These results achieved with over production, inventory build at the factory and dealer level and represent a profit of only €160 per car”
Renault’s improved first half financial results received a mix reception from investors. Some saw a worrying level of stocks and sales to dealers, while others applauded the company for doing well in a tough market.
While Renault’s automotive division saw sales slip by 0.9 per cent to €20.4 billion, its operating margin rose to 2.9 per cent from 2.5 per cent, despite losing sales to Iran because of economic sanctions. The bankruptcy of Better Place didn’t help either, with the potential loss of 100,000 Fluence electric car sales promised by 2016.
Citi Research, Commerzbank and Deutsche Bank came away with positive thoughts about Renault after looking at the numbers.
“We believe far too much has been made about Renault’s inventory levels in the first half, and far too little about positive pricing, which we think is the overlooked story,” said Citi analyst Philip Watkins.
Watkins said Renault’s prices were two per cent higher compared with the same period of 2012, while sales fell seven per cent.
“Although sales to dealers did help free cash flow and EBIT (earnings before interest and tax) this had been reasonably well flagged before, so should not have been much of a surprise either. Presumably dealers remain rational enough not to buy stock they don’t believe they can sell,” Watkins said.
Sascha Gommel of Commerzbank said Renault’s better profit performance came from a much better price and mix contribution and “slight” over production.
Gaetan Toulemonde of Deutsche Bank applauded Renault’s performance, and said it augured well for the company when the European market turned around.
Earnings quality
“We can still debate on the quality of earnings released. However, they are reassuring in a still very weak environment in Europe. Above all these results are showing a strong pricing discipline and a strict control of fixed costs. Thus, when volumes recover, the volume effect coupled with costs savings programmes should translate into strong margin increase,” Toulemonde said.
Morgan Stanley and Bernstein Research weren’t quite so impressed.
“It is, however, worth taking a closer look at how this was achieved. Inventory not only rose to a new peak of 507,000, but more important, Renault shifted some 101,000 units on to dealers lots and also overproduced by 26,000 in the second quarter. As a result, dealer stock is at an all-time high of 367,000 compared with 240,000 in the first quarter and 314,000 in the first half of 2012,” said Morgan Stanley analyst Laura Lembke.
Lembke said this could be a higher risk if emerging markets show no or slow growth, and Europe weakness is renewed.
Max Warburton of Bernstein Research had some negative thoughts too.
BRIC dependent
“These results were only achieved with over production in the second quarter, inventory build at the factory and dealer level and represent a profit of only €160 per car. They were also accompanied by massive write-downs on a region (Iran) and products and negative free cash flow. Renault remains utterly dependent on a group of BRICs and other emerging markets that are already deteriorating and look likely to worsen,” Warburton said.
“Take out the inventory build and arguably the Auto division would have barely broken even,” he said.
Renault CEO Carlos Ghosn, not surprisingly, was upbeat.
“We’re on track to achieve the objectives we announced for 2013,” he said. This includes a positive auto division operating margin and cash flow.
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