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Morningstar | Puegeot Turnaround Has Been Impressive but Not Yet Complete

PSA Peugeot-Citroen expects to penetrate growth markets with its fuel-efficient technologies and by expanding its model lineup. The inclusion of the Opel/Vauxhall brands (completed acquisition August 2017) adds approximately 1.2 million in unit volume, from which the group can leverage economies of scale, but we expect the integration process to take at least until 2020 before cost savings result in meaningful profitability and returns that benefit shareholders.The company suffers from a high-cost manufacturing footprint, overcapacity, heavy reliance on French and German demand, and a socialist government agenda that favors organized labor and prohibits rationalization. Its alliances with Dongfeng and General Motors may provide modest savings through shared platforms and access to Chinese demand but does nothing to solve Peugeot's major problem--too few vehicles manufactured in too much high-cost capacity. The acquisition of Opel/Vauxhall is dilutive to margin and recurring operating income and destroys economic value until model introductions utilizing Peugeot architectures are rolled out through 2026.Since March 2014, the Peugeot family, French government, and Dongfeng have been Peugeot's controlling shareholders, each owning a 14% stake in the company. Historically, the family held the controlling interest until additional capital was needed to fund operations that burned through mountains of cash during the last cyclical downturn in Europe.We recognize the strides made in profitability and returns since current management began turnaround initiatives in 2014. However, completely fixing the combined Peugeot/Opel bloated high fixed-cost base is likely to prove challenging, given the political backlash associated with closing factories in France or Germany. Because the French state is an equity owner, French government interference for the sake of French labor unions could have a negative impact on the company's plans.