Peugeot: The Making Of A Turnaround

Aug.14.14 | About: Peugeot S.A. (PEUGF)

Summary

Peugeot is going through one of the most challenging moments of its existence;

In the beginning of the year, the company outlined a restructuring plan;

The half year results presented some early positive signs about the company recovery;

The current valuations suggest that if the turnaround materializes, there is value potential in Peugeot stock.

Peugeot (OTC:PEUGF) (OTCPK:PEUGY) is a France-based constructor of cars, light commercial vehicles and motorcycles. The company comprises the Peugeot and Citroen brands. Presently, Peugeot is going through one of the most challenging moments of its existence. The European financial crisis was responsible for a plunge in European car sales. The problem is that Peugeot is heavily dependent on the European market, where it gets 58% of the total sales. This situation has led to huge losses during the last couple of years, almost eradicating the company's capital reserves.

Management revamp, capital infusion and a foothold on the Chinese market

However, the Board was very quick in identifying a potential dramatic situation and acted firmly. In order to deliver a solution that could plant the seeds for the company's future the board decided that it needed to change the executive management. Therefore, the company decided to recruit the Renault's ex-COO, Carlos Tavares (Source: Manufacturing.net) which is well known for his abilities to streamline operations (Source: europe.autonews.com).

At the same time, the company closed a deal that allowed the Chinese constructor Dongfeng and the French state to enter the company's capital. This way, the Peugeot family, the French state and Dongfeng each ended up with 14% of the company. This operation allowed Peugeot to add up to USD 4.1 billion to the balance sheet and this way provide the financial strength that the company was lacking. Nevertheless, the deal with Dongfeng will be a huge help for Peugeot to enter the Chinese market (Source: manufacturing.net).

How is it going so far?

I have written about Peugeot previously. However, the 2nd quarter earnings presentation brought interesting information to compare to our initial estimations:

  1. The financial restructuring is well on track. The capital raise was successful and the company also secured other financing lines. This has allowed Peugeot to improve its financial ratios:

Table 1 - Balance sheet ratios before and after the Capital raise

  1. The development of the DS as a premium brand and the improvement of the positioning of the 3 brands (Peugeot, Citroen and DS) are contributing to increase the profitability of the company. On the other hand, a higher focus in reducing the number of car models and improving production efficiency are contributing to an improvement of the company margins:

Table 2 - Performance indicators at half year for 2014 and 2013

  1. The sales in China increased 27.7% (market up 12.8%) thanks to the deepening of the joint venture with Dongfeng. In Europe sales are up 11.7% (market up 6.6%).
  2. The company is on the way to reduce the inventories from € 4.5 billion ($ 6 billion) to € 3.8 billion ($5.1 billion). May I remind that inventory savings are critical in the auto industry.
  3. Production capacity utilization rate in Europe at 84%, against 72% in 2013.

All-in-all, it seems to me that the new shareholder base is conferring much needed stability to the company. This is giving the management room to breathe and to implement a serious industrial strategy at Peugeot.

Benchmarking

In this case, I believe that the price-to-sales ratio and the price-to cash-flow will give a clear indication about the degree of value potential. For the comparison, I chose Volkswagen (OTCQX:VLKAY), Renault (OTC:RNSDF), GM (NYSE:GM) and Ford (NYSE:F), since I believe them to be direct competitors in a wide range of market segments.

Table 3 - Price-to-sales and price-to-cash-flow for Peugeot, VW, Renault, GM and Ford (source: http://money.msn.com/)

As we can see in table 3, the value metrics suggest that Peugeot is significantly valued below its peers. This way, I believe that there is a substantial value potential, if the turnaround materializes.

Conclusion

In my opinion, Peugeot is on track to achieve a turnaround very similar to Ford. The company started by securing financial stability and by revamping the management just like Ford did back in 2006. If you remember, Ford then started working in reducing inventory (increasing efficiency) and in reducing the number of platforms (increasing product focus). Eight years later Ford is a consistently profitable auto producer. I think that Peugeot is on the same path and is indicating early signs of success.

Final thought: "This being said, I think we need to stay lucid and recognize that we are only at the beginning of our turnaround. Even though we appreciate these results as an encouragement to go further and to stay focused and that show high determination in the implementation of our turnaround actions." - Carlos Tavares, Peugeot's CEO (SA transcripts)

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PEUGF over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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