EUR 850.00 For Business Accounts Only

Morningstar | Peugeot Turnaround Continues With Solid 2018; Maintaining EUR 16 Fair Value Estimate

No-moat French automaker PSA Peugeot Citroen reported 2018 diluted earnings per share before special items (EPS) of EUR 4.17, trouncing the sell-side consensus EPS estimate of EUR 3.71 by EUR 0.46 and beating our EUR 3.82 EPS estimate by a whopping EUR 0.35. The 2018 EPS result represented a 51% jump or EUR 1.40 higher than the EUR 2.77 reported a year ago. French companies like Peugeot only disclose full financial statements in the second quarter and at the year-end, with only revenue reported in the fiscal first and third quarters. The market is well aware of the turnaround and currently trades the shares at a rich 38% premium to our EUR 16 fair value estimate. At a 2-star rating, we view the stock as being overvalued.

We are impressed with Peugeot’s Push to Pass turnaround plan. Peugeot Citroen DS (PCD) automotive group revenue increased 6% to EUR 43.0 billion on favorable pricing as well as product and country sales mix. Excluding negative currency translation, revenue would have increased by roughly 8%. Opel/Vauxhall automotive group (OV) contributed EUR 18.3 billion to the consolidated total revenue of EUR 74.0 billion, which also includes Peugeot's ownership stake in Faurecia and financial services.

Consolidated recurring operating income showed healthy improvement at EUR 5.7 billion, up 43% versus the year-ago result of EUR 4.0 billion. Full-year OV recurring operating income was EUR 859 million versus a EUR 179 million loss during Peugeot’s five months of ownership in 2017. Even so, non-recurring items for the year included substantial restructuring charges for the automotive group, totaling EUR 1.1 billion.

Management’s 2019 guidance was upbeat, looking for stable but healthy European light vehicle demand, with 1% decline in Latin America, 5% increase in Russia, and a 3% decline in China. 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 for Brazil.

For Push to Pass Phase II, covering the turnaround from 2019 to 2021, the company has combined the recurring operating margin target of PCD and OV into a single 4.5% target. Management characterized the margin objective as a floor, or as an "all-weather" target, meaning that the level of profitability is expected to be achieved even under more harsh operating environments.

The change to a combined target reflects the integration of PCD and OV automotive operations during this phase of the Push to Pass turnaround. Peugeot’s prior PCD objective was an average of 4.5% during the 2016-18 period and for greater than 6% in 2021, while OV's target was to achieve 2% by 2020. PCD recurring operating margin averaged 7.3% and was 8.4% for 2018, showing impressive turnaround progress. OV group substantially surpassed its objective, turning in a 4.7% recurring operating margin in 2018, a remarkable two years ahead of schedule.