The full-year profit warning that came with the French carmaker’s
third-quarter resultswas an eerie flashback to the one that came with its
second-quarter numbers.
The upshot is that operating profit for the full year in the auto division,
which contributes about two-thirds of its revenues, will fall to zero. The
Japanese tsunami hurt, but investors – who did not move the company’s share
price – should not be distracted from the bread-and-butter problems that
have caused Peugeot’s troubles.
European exposure
The first problem is its exposure to the contracting western European market
and the glacial rate at which it is expanding elsewhere. The region should
generate about 60 per cent of its sales this year – a higher proportion than
that of almost every other rival.
It is no wonder then that the company has contended with intense price
competition. Its spare capacity, which is about 8 percentage points higher
than that of Volkswagen, Daimler, or BMW, compounds the problem.
All of this leaves the company terribly exposed to another economic downturn –
the reason why, since July, Peugeot has underperformed the Eurofirst 300
auto index by 20 percentage points.
No easy solution
Management knows that something must be done and it has commenced an €800m
cost-cutting programme. But given that Peugeot has already made €2.6bn of
cuts over the past three years and will still only break even in 2011, the
impact of another €800m is debatable.
Indeed, excluding this latest cost cut, the automotive division’s operating
profit margin will probably be less than 0.5 per cent next year, says
Goldman Sachs.
Investors should remain wary. Although some may find it hard to look past
Peugeot’s attractive valuation - just four times 2012’s earnings - the
company faces problems that have no easy solution.
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