EUR 850.00 For Business Accounts Only

Morningstar | Peugeot Reports Mixed 3Q Revenue Results; EUR 16 FVE Unchanged

No-moat Peugeot reported a 0.8% increase in third-quarter revenue for the Peugeot Citroen DS automotive division, but excluding negative currency translation, PCD revenue would have been up 3.7%. The year-over-year increase in revenue was impressive, considering a 26.9% PCD worldwide unit volume drop to 495,000 units versus 678,000 units last year. A major portion of the volume drop was attributable to the suspension of Iranian production.

Including the Opel Vauxhall acquisition, the company reported 7.8% revenue growth on a 16.7% decline in volume, but it did not provide Opel Vauxhall comparable revenue for the entire third quarter of 2017 (OV was acquired as of Aug. 1, 2017). We expect full-year automotive revenue to be roughly 18% higher, including Opel Vauxhall. 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 stock, which currently trades at a 19% premium to our EUR 16 fair value estimate.

Management said that it now expects European light-vehicle demand to increase 2% for 2018, slightly better than flat previous guidance and more in line with our forecast. However, the company lowered its China and Latin America market expectations by 1 percentage point each, to 1% and 3% compared with prior guidance for 2% and 4% increases, respectively. Russia market guidance was unchanged at 10% growth. 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 a high-single-digit growth rate in Brazil. The company maintained its recurring operating margin targets for the Peugeot automotive group and the Opel Vauxhall group.

Peugeot’s PCD objective is an average 4.5% operating margin during 2016-18. The company has already exceeded this target, thus far averaging 6.1%. 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 2018 target of 6.6%-7.4% adjusted EBIT (before special items) margin is more than 300 basis points higher than the blended margin of PCD and OV.

During the past 10 years, Peugeot's high, low, and median EBITDA margin has been 11.0% (2015), 4.1% (2012), and 7.1%. We assume a normalized sustainable midcycle EBITDA margin of 7.0%. Despite the potential for higher spending attributable to industry disruptive technologies like mobility services, autonomous driving, and electrified powertrain, as well as the highly competitive nature of the global automotive industry, our midcycle EBITDA margin assumption reflects only a 10-basis-point reduction below the 10-year median. For our model to reach a fair value equivalent to the sell-side EUR 25 consensus price target, we would have to believe Peugeot is capable of a normalized sustainable 9.6% midcycle EBITDA margin, or 250 basis points higher than the 10-year median.