PEUGEOT ON A ROLL
FRENCH carmakers are inferior to the Germans. You can’t make decent money in the mass market. With a looming trade war, regulatory uncertainty and technological upheaval, the traditional autos giants are doomed. For a pretty emphatic riposte to all of those industry assumptions, look no further than the €2.6 billion (RM12.38 billion) of free cash flow generated by Peugeot SA in the first six months of this year.
Under chief executive officer Carlos Tavares — who last year added General Motors Co’s (GM) Opel unit to the Peugeot stable — the French manufacturer appears to be firing on all cylinders. Thanks to surging sales of sports utility vehicles and diligent cost-cutting, the company’s core Peugeot-Citroen-DS division has achieved an 8.5 per cent recurring operating profit margin.
That’s Mercedes and BMW territory, which is striking when you consider that the latter have far higher sticker prices.
Tavares has certainly had his share of good fortune, and he’s been helped by some pretty favourable accounting adjustments. But it’s hard not to be impressed by the recent operating performance, as well as a quick turnaround at Opel/Vauxhall — which lost money for years under GM’s ownership.
Clutching for a superlative to sum up Tuesday’s results, Bernstein analyst Max Warburton opted for “Boom!” The shares jumped 10 per cent, bringing this year’s increase to about onethird.
Still, all of the fears around the car industry Peugeot’s shares have performed well in the past year. Peugeot SA CAC 40 Index are not without foundation. And it’s wise not to get too swept away by Peugeot-mania and the seemingly miraculous job it’s done on Opel.
The group profit margin that it bragged about excludes €750 million in restructuring charges and other one-offs, largely Opel-related. If you add them back, Opel’s five per cent operating margin all but disappears.
Peugeot also capitalises about half of its research expenditure, meaning these costs don’t hit the profit and loss statement. Under GM’s accounting, Opel couldn’t do that.
Similarly, almost half of the group’s free cash flow stemmed from a £1.2 billion improvement in working capital, again mostly at Opel. Paying your suppliers a bit more slowly might be sound business, but it’s not rocket science either and it’s hard to keep doing it.
Tavares is blessed, too, by Peugeot’s limited international presence. A trade war hurts globetrotting carmakers, but three-quarters of Peugeot’s first-half revenue was from Europe, and it doesn’t sell cars in the United States.
Something that would have been a weakness in pre-Trump times is now an advantage. This hasn’t gone unnoticed by shareholders: The stock trades on eight times estimated earnings — pretty good for this industry.
For now, though, these are caveats to what is a clear improvement at Peugeot. There’s nothing wrong with running your finances in the most optimal way possible.
In addition to winning a soccer World Cup, France has shown its carmaking chops are in pretty decent shape, too. Chapeau, as they say.