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Renault Investor Favourite When Compared With Peugeot

Build-up Of Stocks Raises Doubts About Free Cash Flow Targets

Renault is rated more highly than Peugeot by many investors, not least because it is not so concentrated on Europe, and it has a large stake in Nissan to bolster its finances.

But some investors doubt Renault’s targets for 2012, and worry that a build-up of stocks will lead to a production cutback.

Investors might now be a bit more wary of Renault after the change of incumbent at the Presidential palace. After all, the French government owns a 15 per cent stake and it is clear that Peugeot was keen not to offend the government of whatever stripe, even though it has no direct control over the company. But Renault still comes out ahead in the popularity stakes, according to some investors.

Renault’s first quarter sales fell nine per cent to €9.54 billion compared with the same period last year, but after the announcement, the company reiterated its objective of generating a positive automotive operational free cash flow in 2012, and sales growth for the year of between three and four per cent. (In early May, Renault-Nissan announced a $750 million investment to take a majority stake in AvtoVAZ of Russia. Renault spent $1 billion in 2008 buying 25 per cent of the company.)

 “Renault is highlighting an adverse environment in Europe that is even weaker than expected, but compensated for by regions outside Europe,” said Commerzbank analyst Sascha Gommel.

“Renault confirmed its guidance for a positive automotive free cash flow this year. Compared with Peugeot-Citroen’s anticipated underlying cash burn, this is clearly a strong indication that Renault’s strategy shift towards cash generation is bearing fruit,” Gommel said.

Difficult to reconcile
Credit Suisse analyst Erich Hausser wasn’t convinced by Renault’s case, saying it was difficult to reconcile with the fact Renault’s order book had declined by around 30 per cent while stocks rose by 20 per cent.

“We maintain our view that Renault will consumer cash in 2012. Despite renewed assurances by management that the company will generate cash this year, we believe that production will need to be cut at some stage in 2012 and that Renault will fall short of its free cash flow target this year by around €500 million,” Hauser said.

Deutsche Bank also prefers Renault to Peugeot.

“”We still like the Renault case: low valuation, downside protection with Nissan, strong product offensive starting in mid 2012,” said Deutsche Bank analyst Gaetan Toulemonde.

He likes the Dacia brand, saying the new Lodgy could be as profitable as the Duster; the electric vehicle lineup too.

“Overall a still good risk/reward investment,” Toulemonde said.

Commerzbank’s Gommel said Renault was weathering the storm in Europe better than Peugeot, but despite that, preferred some German manufacturers as investments.

“We also like Renault’s strong emphasis on cash generation. However, we still see more compelling investment cases in the sector  like Volkswagen and Daimler and believe Renault’s core markets remain well challenged into the second half of 2012,” Gommell said.

Neil Winton – May 15, 2012

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