Sept. 30 (Bloomberg) -- Renault SA Chief Executive Officer Carlos Ghosn needs a new blockbuster to pull Europe's worst-performing auto stock out of a nosedive and defend his reputation. He may not get it when he introduces the revamped Megane compact at the Paris Motor Show this week.

Ghosn unveils the car as key models are losing ground to Volkswagens, Peugeots and Fiats. To keep sales growing, the Boulogne-Billancourt, France-based company has relied on the low-cost Logan sedan in emerging economies, where sales are beginning to slow as the global financial crisis take hold.

``The tide's turning against them now,'' said Stuart Pearson, an analyst at Credit Suisse in London who switched his rating on Renault to ``underperform'' from ``outperform'' yesterday. ``The international markets that were Renault's strength are becoming its Achilles heel, and the new Megane isn't going to be enough to meet next year's targets.''

Renault's share of the western European market dropped to 7.7 percent in the first eight months of this year from 9.7 percent in 2005 -- when Ghosn took over -- even as it outspent rivals on model development. Two years ago, Ghosn vowed to post a 6 percent operating margin by 2009 or ``take the consequences.''

AvtoVAZ Role

In July, Renault said the company would meet its 4.5 percent full-year margin target only after a 165 million-euro ($237 million) payment from OAO AvtoVAZ, the Russian automaker in which it owns a 25 percent stake, for licenses to build two versions of the no-frills Logan.

Goldman, Sachs & Co. advised clients to sell Renault shares last month, as it maintained a ``buy'' on larger French carmaker PSA Peugeot Citroen. Lead analyst Stefan Burgstaller cited concern that Renault's 2009 targets will also prove ``unachievable without `help' from AvtoVAZ.''

European car registrations plunged 16 percent in August, the biggest year-on-year decline since 1999, as a slump in demand spread. In eastern Europe, sales tumbled 8.7 percent after gaining 4.2 percent in the first seven months. Growth is also slowing in Russia and Brazil.

``Renault couldn't have picked a worse moment to launch the car that's supposed to be the backbone of its European business,'' said Peter Schmidt, managing director at Warwick, England-based consulting firm Automotive Industry Data.

Laguna vs C5

Renault's last offering, the Laguna, is set to record about 120,000 registrations in 2008, according to consulting firm J.D. Power, compared with an initial target of 190,000. Touted as the new flagship before its October 2007 introduction, the mid-sized hatchback has been overtaken by Citroen's C5 in western Europe.

``It's a pretty ugly car with that old-fashioned front end,'' said Frank Maizeroi, 37, a Paris construction manager who turned down a company-leased Laguna in favor of a Citroen. ``The C5 looks like a high-end German sedan.''

Two earlier generations of the Megane and its Scenic minivan variants doubled Renault's profit at peak sales, analysts say.

``This time it's going to be tougher for them,'' said Andrew Lobbenberg at Royal Bank of Scotland in London, who has a ``hold'' recommendation on Renault and a ``buy'' on Peugeot. ``The Scenic isn't the monopoly it used to be.''

Citroen's C4 Picasso minivan has gained market share since its 2006 introduction and will soon have a new Peugeot-branded stable mate, based on the recently updated 308 hatchback.

Volkswagen AG, Europe's biggest carmaker, is also scheduled to introduce the sixth version of the Golf compact, its best- selling car, a month before the Megane's November sales debut.

Fuel Efficiency

A 15 percent fuel-efficiency advantage will favor the Golf over the Megane as higher gasoline and diesel costs weigh more heavily on car buyers, Credit Suisse's Pearson said. Sales of the existing Megane are down 35 percent in Europe this year, while the Golf's are slightly higher.

Some analysts say holding Renault to the 6 percent operating margin target is too harsh given current market conditions. Out of 25 analysts who follow both French carmakers, 11 have ``buy'' recommendations on Renault and seven on Peugeot.

Gaetan Toulemonde, a Paris-based Deutsche Bank analyst with a ``buy'' rating on Renault, said he believes the Megane can lift the company's profitability a third time.

``This vehicle category is Renault's area of expertise,'' said Toulemonde, who predicts a 5.2 percent operating margin for the company in 2009. ``Even if they make 4.5 percent, it's a damn good performance in this environment.''

Ghosn's first redesign, the Twingo, more than doubled the old model's first-half sales as higher fuel costs and environmental taxes boosted demand for small cars. The Renault mini was nonetheless outsold by a new entrant, Fiat SpA's retro-styled 500.

Shares Drop

Renault's share price has plunged 54 percent this year, the worst performance in the 13-member Dow Jones Stoxx 600 Autos & Parts Index, while 12th-ranked Peugeot has dropped 49 percent. Renault rose 54 cents, or 1.2 percent, to 44.56 euros in Paris today, valuing the company at 12.7 billion euros.

Ghosn, 54, cemented his reputation as ``Le Cost Killer'' with his turnaround of Tokyo-based Nissan Motor Co., where he threatened to resign unless objectives were met. He remains CEO of Nissan, which is 44 percent-owned by Renault.

Rather than step down from Renault if he misses targets, Ghosn is likely to face pressure to relinquish his Nissan role, said analysts including Michael Tyndall of Nomura Securities.

``It's increasingly unlikely he'll deliver on his promises, so he will have to placate some mightily unhappy shareholders,'' said Tyndall, who recommends buying Renault shares. ``They need to hear from him more and see him more.''

Management Structure

Ghosn last year ceded daily oversight of Nissan's North American operations to a subordinate after the automaker cut its earnings forecast. Renault-Nissan could ``one day come back to a system where you have two CEOs,'' he said in May.

In the last three years, Renault has channeled an average 8.7 percent of auto revenue into new model development and production, compared with 6 percent at VW and 5.8 percent at Peugeot, according to data compiled by Nomura. Joint projects with Nissan help Renault's investment dollars go further.

Through Nissan, Renault is also vulnerable to the collapsing U.S. auto market, said Thierry Huon, an analyst at Exane BNP Paribas. The Paris brokerage has a ``neutral'' rating on Renault and an ``outperform'' on Peugeot, which has no U.S. exposure.

``Nissan was once seen as an opportunity for Renault,'' Huon said. ``Right now it's more of a risk.''

To contact the reporter on this story: Laurence Frost in Paris at Lfrost4@bloomberg.net

Last Updated: September 30, 2008 13:49 EDT