Peugeot Without Profit Lures Shorts With Shares Up 151%Inyoung Hwang and Namitha Jagadeesh
The rally that sent PSA Peugeot Citroen up 151 percent in less than a year is attracting short sellers and options traders who say the gains won’t last.
Bearish options cost the most since December 2008 relative to bullish ones, data compiled by Bloomberg show. Short sales, or stock borrowed and sold in a bet on future declines, have climbed to the highest level since June 2011, according to Markit, a provider of financial information.
Europe’s second-biggest carmaker will probably report a third year of losses, and Moneta Asset Management’s Patrice Courty said it may take even longer for the company to be profitable. Peugeot shares touched a two-year high last week as the company laid out plans in February to overhaul its lineup and investors speculated a new chief executive officer will turn the company around.
“It makes sense to short the stock right now,” Courty, a fund manager at Moneta, said in a phone interview. His firm manages 2 billion euros ($2.8 billion) and holds Volkswagen AG shares. “It’s difficult to put a value on Peugeot because they are not going to be profitable until at least 2016, and more likely 2017. It’s a recovery play. Unless the European car market improves this year faster than expected, I think it’s going to be hard.”
Peugeot’s success is more closely tied to the euro-area economy than rivals. About 71 percent of its sales came from the region in 2012, data compiled by Bloomberg show. Volkswagen, Europe’s largest carmaker, generated 60 percent of its revenue from the region. At Renault SA, continental Europe accounted for 58 percent of sales last year, the data show.
Volkswagen’s dominance in the region has increased as the company took market share from Peugeot. Last year, it controlled 24.8 percent of the car market in western Europe, more than double Peugeot’s 11.1 percent share. Ten years ago, the region’s two biggest carmakers were much closer, with Volkswagen’s share at 18.2 percent compared with Peugeot’s 14.8 percent, according to data from industry trade group ACEA.
Peugeot will post a loss of 26 euro cents a share excluding some items this year, according to the average analyst estimate in a Bloomberg survey. They predict the company will be profitable in 2015.
Dongfeng Motor Corp. and the French government agreed to pay 800 million euros each last month, giving them a Peugeot holding of 14 percent apiece. The family’s stake will be diluted to 14 percent from 25.5 percent, ending its control over the almost 120-year-old auto company. Banco Santander SA will also provide funds through a partnership with Peugeot’s lending arm.
Carlos Tavares, who will take over as CEO on March 31, said the carmaker needs to increase research and development funding and focus model offerings on the most profitable vehicles. He said he’ll detail his “Back in the Race” turnaround plan in mid-April.
Peugeot’s past attempts at partnerships have sputtered. General Motors Co. purchased a 7 percent holding in 2012, only to sell its entire stake in December after the alliance struggled to meet the goal of finding savings through joint purchasing and product development. In 2012, a venture with Bayerische Motoren Werke AG to develop electric powertrains and components broke down.
The French automaker tumbled 82 percent from a January 2011 high through its April low. The deal with Dongfeng and the French government helped it rally 40 percent this year, making it the best performing stock in the Stoxx Europe 600 Index after Iliad SA and Scania AB.
Peugeot puts hedging against a 10 percent decline in the shares cost 9.1 points more than calls betting on a 10 percent jump, according to three-month implied volatility data compiled by Bloomberg. The price relationship climbed to 10.5 on March 5, the highest since December 2008.
Short sellers have increased bets that the stock will decline. Short interest in Peugeot was at 16 percent of shares outstanding and climbed to 19 percent last month, up from a low of 7.4 percent in October, according to London-based Markit. That’s the seventh-highest level in the Stoxx Europe 600 Index and compares with the average short interest of 2.1 percent for companies in the gauge.
Among the firms shorting Peugeot are $12.5 billion hedge fund Odey Asset Management LLP and D.E. Shaw & Co., a $32 billion fund, according to data compiled by Bloomberg and the French exchange.
Jonathan Goodman, a spokesman for Peugeot, did not respond to e-mails and a call seeking comment on the bearish bets.
The capital injection and new CEO will improve Peugeot’s recovery, according to Jacques Porta, who helps oversee $780 million at Ofi Gestion Privee in Paris.
“The increase in capital is vital for the company,” Porta, who bought Peugeot shares last month after the carmaker signed the agreement with Dongfeng, said in an interview. “We must not forget that the company was dead until some days ago. The Dongfeng deal will solve vital problems of capital need, bring in a new management and offer a big opportunity to increase their market share in China.”
Peugeot trades at 1.4 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That compares with 17.3 for carmakers and auto-parts manufacturers in the Stoxx 600.
Last week, the Peugeot 308 model was named Europe’s Car of the Year at the Geneva International Motor Show, beating six other vehicles, including electric autos from BMW and Tesla Motors Inc. The hatchback is part of Peugeot’s strategy of developing up-market vehicles to end losses.
The CAC 40 Volatility Index, a measure of options prices on the French stocks gauge, slipped 0.5 percent to 17.55 today. Europe’s VStoxx Index, tracking derivatives prices on the Euro Stoxx 50 Index, fell 1.8 percent to 19.77.
All six of the most-owned Peugeot options were bearish, according to data compiled by Bloomberg. Puts protecting against a 21 percent decline by March 21 had the largest open interest, followed by March 10-euro puts and June 10-euro puts.
The new mix of stakeholders will pose a challenge to incoming CEO Tavares, according to Harald Hendrikse, an analyst at Nomura Holdings Inc. in London.
“He will improve things, but at the same time, the company’s been restructuring for three years,” Hendrikse said by phone. He has the equivalent of a sell rating on Peugeot. “The underlying market isn’t getting significantly easier, and this new CEO will have to work with a Chinese partner, the French government and a family. Good luck making decisions. Structurally, it’s not a good company and it’s not going to become a good company anytime soon.”