Peugeot Owner Shows How to Drive Through a Crisis -- Heard on the Street
July 28 2020 - 09:34AM
Dow Jones News
By Stephen Wilmot
A crisis is when good management really counts.
Car makers are starting to post their numbers for the second
quarter, likely to be the most difficult in recent history due to
coronavirus shutdowns. The pattern so far: Companies that were
handling the road well before the pandemic are finding a much
smoother path through it.
Exhibit A is PSA Groupe, which is in the process of merging with
Fiat Chrysler to become one of the world's largest car makers. On
Tuesday it reported first-half profits, including an adjusted
operating margin for its core automotive division of 3.7%. That is
an impressive result given that dealerships in its key European
markets were closed for roughly two months. Key peers such as
Volkswagen and Renault are expected to lose money. The stock rose
3% in morning trading, bringing Fiat Chrysler up with it.
Exhibit B is Nissan, which has been floundering for some years.
After the Tokyo market closed on Tuesday, it reported another
quarter of steep losses, including an operating margin of -10.3%
including its share of a big Chinese joint venture.
Since receiving a government bailout in 2012, PSA has become
Europe's most profitable mass-market car maker. Chief Executive
Carlos Tavares has launched new products that command better prices
while focusing single-mindedly on efficiency -- first at the
company's historic Peugeot and Citroën brands, then at the
Opel-Vauxhall business it acquired in 2017 from General Motors. The
underperforming European business of Fiat Chrysler will give him a
similar challenge next year, assuming the deal goes ahead in the
first quarter as planned. It is currently rumbling through a
European antitrust process focused on the companies' strong
combined position in vans.
Nissan is at the opposite end of this corporate cycle. Aging
products have undermined its brand and pricing power in the key
U.S. market, while questions about its leadership -- it has had
three chief executives since the 2018 arrest of longtime boss
Carlos Ghosn -- may have made it harder to contain costs.
Admittedly, PSA was helped by the French government. It didn't
get an emergency loan as its French peer Renault did, but it
benefited from wage support for furloughed workers and subsidies
for electric-car purchases. This last point is crucial given
tightening emissions requirements in Europe, which are forcing
manufacturers to sell more electric vehicles, never mind the cost.
PSA's electric and hybrid vehicles weren't as profitable to sell as
its average car in the first half, but they didn't lose money.
PSA's first-half results are a testament to just how much car
makers can achieve, even in the toughest conditions, when they
focus on what matters. During the shutdowns this was cash
management, and PSA finished the half with positive cash flows,
excluding working-capital effects that should unwind as it ramps up
production in the second half.
This is a rare auto-industry story worth buying into, but there
may be smarter vehicles to do so than PSA stock. Fiat Chrysler
shares are trading at a roughly 9% discount to their value under
the merger terms. Exor, the investment vehicle that owns 29% of
Fiat Chrysler, trades at a discount to the value of its
holdings.
One way or another, these are all investments in the success of
next year's megadeal. PSA's performance during the pandemic
inspires confidence that it will at least have strong leadership on
its side.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
(END) Dow Jones Newswires
July 28, 2020 09:19 ET (13:19 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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