Bloomberg News

Peugeot Worst Casualty of Europe Crisis With Shares Fading: Cars

September 28, 2011

Sept. 29 (Bloomberg) -- PSA Peugeot Citroen’s sliding share price has left the French carmaker trading at a record discount to Volkswagen AG on investor expectations it will be the worst automotive casualty of the region’s sovereign debt crisis.

Paris-based Peugeot has declined 41 percent this year, the steepest decline among European automakers, expanding the gap to Volkswagen’s shares to 91 euros from a 10-year average of 16 euros. Its 3.8 billion-euro ($5.2 billion) market value is less than one-tenth of 2010 annual revenue of 56 billion euros.

Chief Executive Officer Philippe Varin’s efforts to reduce dependence on Europe through emerging-market expansion may be too late to prevent Peugeot, Europe’s second-largest automaker after VW, from taking the brunt of a downturn, investors said. The first-half operating margin at Peugeot’s automotive division fell to 1.8 percent from 2.5 percent.

“As soon as there’s any kind of wind, Peugeot’s margins blow away,” said Lorenz Blume, an analyst at Stuttgart-based LBBW Asset Management, which offloaded 190,000 Peugeot shares in the first half and now holds 3,600 among its 18 billion euros of investments. “There’s no such thing as too cheap if they’re going to burn cash again.”

The carmaker posted first-half free cash flow that was a negative 179 million euros and in July forecast a figure “close to neutral” for the full year. During the last downturn, Peugeot reported 3.76 billion euros in negative cash flow in 2008 and a 343 million-euro net loss, prompting Varin to promise cost cuts and a sales boost to narrow the gap with peers.

Vehicle Valuations

Peugeot’s first-half European sales accounted for 62 percent of the total, while VW’s made up 50 percent. The slump in the French company’s stock means Peugeot is valued at 2,096 euros per car sold in the first half versus 11,334 euros for every vehicle sold by Wolfsburg, Germany-based VW.

Peugeot shares trade at 3.2 times the company’s estimated full-year earnings, according to Bloomberg data. That compares with 3.6 for Renault SA, 4.7 for VW and 6.4 for Fiat SpA.

“When things go bad in Europe, you sell Peugeot,” London- based Credit Suisse analyst Erich Hauser said. “Investors see the stock as a pure regional play.”

Varin introduced new vehicles including the 5008 crossover, 508 large car and Citroen DS3 premium subcompact in the last two years to lift sales and pricing power. The carmaker’s eight- month European market share nonetheless declined to 12.9 percent from 13.7 percent a year earlier, according to the Brussels- based European Automobile Manufacturers’ Association. VW gained to 23.2 percent from 21.4 percent.

VW’s Advantages

“What’s worrying is that they’re at a good stage of their model cycle, yet there’s little evidence of any margin enhancement,” said London-based Sanford C. Bernstein analyst Max Warburton. “Instead it’s going the other way.”

Volkswagen’s success over Peugeot rests in part on an early expansion in China, which is now its single biggest market. The carmaker also has a stable of nine brands, including profit driver Audi AG, the world’s second-biggest maker of luxury cars. Peugeot entered China years after Volkswagen and has no luxury brand in its portfolio.

While Peugeot counts on its home region for 62 percent of volumes and a bigger, undisclosed share of earnings, Fiat’s European exposure is diluted by its majority stake in Chrysler Group LLC, and Renault’s by a 43.4 percent holding in Nissan Motor Co. that brings dividend earnings from China, India and North America.

‘Thrown in Towel’

VW’s first-half earnings before interest and taxes more than doubled to 6.09 billion euros on rising demand in China. Peugeot’s operating profit in the period was flat at 1.16 billion euros.

“That was a big disappointment after everything we’d heard about the new models,” said Lionel Heurtin, who helps manage 1.5 billion euros in equity investments for Paris-based OFI Asset Management and trimmed his Peugeot holding by one-fifth on Sept. 12. “I’ve more or less thrown in the towel.”

To be sure, others see Peugeot’s share-price plunge as a buying opportunity, provided that the worst macro-economic concerns prove to be exaggerated.

“The valuation is compelling,” said Albrecht Denninghoff, a Frankfurt-based analyst at Silvia Quandt Research GmbH who recommends buying the stock. “With the right trigger, it could flip from the sector’s worst performer to the best.”

‘Reduced to Mid-Cap’

Peugeot has a “stable shareholder structure and a strategy based on long-term vision, not market valuation,” spokesman Pierre-Olivier Salmon said when asked about the family- controlled company’s share performance. The prospect of another economic slump “reinforces our strategy rather than undermining it,” he said. The carmaker declined to make executives available for interviews for this story.

VW is increasing the pain for Peugeot with lower-priced vehicles in smaller-size categories traditionally dominated by the French and Fiat. After revamping the Polo subcompact in 2009, VW will introduce the Up! micro car at the end of 2011.

Peugeot was the first European carmaker to announce belt- tightening measures in anticipation of a renewed slump. Varin told reporters Sept. 13 that he was preparing to cut temporary contracts accounting for 10 percent of domestic manufacturing workers. VW is still adding extra shifts at German factories to keep up with demand for its models outside the region.

With investors concerned about Peugeot’s future profitability as Europe’s economy slumps, the carmaker last week dropped to the bottom ranking on France’s main market index.

“It’s astonishing to see Peugeot effectively reduced to a mid-cap,” said Valerie Cazaban, who helps manage $100 million in assets including Peugeot stock for Paris-based Stratege Finance. The possibility of relegation from the benchmark index may now be “weighing the stock down further,” she said.

--Editors: Chad Thomas, Chris Reiter

To contact the reporter on this story: Laurence Frost in Paris at lfrost4@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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