EUR 850.00 For Business Accounts Only

Morningstar | Peugeot Reports 1Q Revenue and Volume Down, Minor Tweak to 2019 Guidance; EUR 16 FVE Unchanged

No-moat-rated Peugeot reported a 1.8% decline in first-quarter revenue for the automotive division, but excluding negative currency translation, revenue would have been down 1.0%. Unit volume dropped 15.7% to 0.886 million versus 1.052 million last year, mainly due to discontinued Iranian operations. We expect full-year automotive revenue to be slightly higher on easier comparisons in the second half of the year. The French automaker only discloses revenue in the first and third quarters while complete financial statements are reported for the first half and full year. We think the market has gotten ahead of itself with this 2-star-rated stock, which currently trades at a 47% premium to our EUR 16 fair value estimate.

Peugeot automotive group, which includes Peugeot, Citroen, Opel, and Vauxhall brand vehicles, reported first-quarter revenue of EUR 14.2 billion, down 1.8% versus EUR 14.4 billion reported last year. Faurecia revenue in Peugeot's consolidated result was 0.2% higher at EUR 4.325 billion. Consequently, consolidated revenue declined 1.1% to EUR 17.98 billion from EUR 18.18 billion for the first quarter of 2018. Within automotive group revenue, we were pleased to see 1.3-percentage-point and 2.3-percentage-point increases in price and product mix, respectively. However, currency, volume, country mix, and sales to partners (Iran, General Motors) more than offset the positive effects from price and product mix.

The market has bid the shares higher on the belief that Peugeot will benefit relatively more from European new-vehicle plateau demand than other European automakers, as well as potential cost synergies from the Opel acquisition. While we agree with the premise, we disagree with the valuation. Peugeot is too dependent on French new-car demand and has too much high-cost, low-efficiency manufacturing. In a European demand cycle turn, Peugeot’s operating leverage will be significantly more negative relative to other Europe-based automakers, which have more geographically diversified sales volume. The acquisition of Opel Vauxhall provides economies of scale, but what both organizations need is a 20% head count reduction and more-efficient manufacturing operations. We think the current market valuation treats the stock as though synergies will enable BMW-like profitability and the integration will be immediate.

Management only slightly tweaked its 2019 guidance. While stable Europe, down 3% China, and 5% Russia market outlooks were unchanged, Peugeot is now forecasting a 2% decline in Latin America versus a 1% decline in previous guidance. Peugeot is more heavily dependent on Argentina than Brazil in Latin America, which accounts for management’s lower forecast in the region versus our forecast for high-single-digit growth for Brazil.

The company maintained its recurring operating margin (excludes special items) targets for the automotive group at "over 4.5% on average in 2019-21." Even so, the company has already exceeded this target, thus far averaging 4.9% during the last five years, including 5.9% reported for 2018. Management’s objective for Opel Vauxhall is a 2% operating margin by 2020 versus losses in the past several years. While the margin expectations demonstrate management’s resolve to integrate the operations to extract favorable operating leverage and economies of scale, the level of combined profitability is the lowest among major automakers. Fiat Chrysler’s target of 9.2%-10.4% adjusted EBIT (before special items) margin is more than 400 basis points higher than the 4.5% blended 2019-21 average margin target of PCD and OV.