While PSA Peugeot Citroen and Renault SA have emerged as clear winners among auto stocks this year, their financial performance hasn’t kept pace.
The two French manufacturers, which underperformed in the stock market during the 2008 financial crisis, have benefited from the sales recovery in Europe, which represents at least half of their deliveries. At the same time, their profit margins and sales growth are lagging behind peers, according to data compiled by Bloomberg.
Peugeot, which sold 61 percent of its vehicles in its home region over the first five months of the year, is especially exposed to Europe.
“There’s going to be a moment when there will be a reality check for Peugeot,” said Kristina Church, an analyst at Barclays Plc who has an underweight recommendation on the shares. “A lot of this outperformance has been driven by the European car sales recovery. The fundamentals of Renault are much stronger than Peugeot, but if we’re talking about the macro situation, both stocks are exposed.”
With European economies growing more slowly than those in the U.S. and Asia, and Greece’s debt crisis causing further turmoil in the region, the car market recovery remains fragile. European auto sales advanced 6.7 percent in the first five months of the year, according to the European Automobile Manufacturers’ Association. That’s faster than the association’s forecast at the start of the year for 2 percent growth in 2015, and the group is sticking with that prediction.
Peugeot, Europe’s second-largest carmaker after Volkswagen AG, saw its sales in the region grow 1.7 percent to 632,349 vehicles, while Renault’s jumped 10 percent to 575,116 vehicles. Peugeot’s shares have soared 84 percent this year while Renault is up 57 percent.
The pace of Peugeot’s stock recovery is also explained by its restructuring and cost cuts. The company in February reported its first annual profit in three years, after the economic crisis brought it to the verge of bankruptcy in 2013.
Chief Executive Officer Carlos Tavares, who joined Peugeot in 2014, has dubbed his turnaround plan “Back in the Race.” The goal is to streamline the carmaker’s product line, better position its three brands, including the new luxury DS nameplate, and continue efforts to restructure, in particular in the money-losing regions of Russia and Latin America.
China’s Dongfeng Motor Corp. and the French government were among the investors who bought 3 billion euros of new shares in the carmaker last year to help finance the turnaround. Peugeot reached its goal of positive operational free cash flow two years earlier than originally targeted.
That turnaround isn’t over yet. So why are markets so bullish?
“Because all investors have already bet that we’ve achieved Back in the Race,” Tavares said at a press briefing in Morocco last month as the carmaker was about to announce the building of its first plant in Africa. “We’ll see, we’ll see. They’re putting pressure on us.”
Hélène Mazier, a spokeswoman for Renault, declined to comment on the company’s stock performance.
Some analysts are still betting that shares of Peugeot and Renault will keep rising. Exane BNP Paribas’s Stuart Pearson this week called Peugeot his top pick, increasing his target price by 10 percent to 23 euros a share “to reflect our increased European margin expectations.” Horst Schneider at HSBC Investments wrote that Renault and Peugeot were among nine stocks that “have the potential to deliver an upside surprise to earnings.”
Greece’s showdown with the European Union over its bailout is just the latest threat to economic stability.
“Anything that could destabilize the fragile European economy is, a priori, bad for our business,” Tavares said last month.