$5 for 3 months. Save 83%.
$5 for 3 months. Save 83%.

French Renault builds profit hopes

Neil Winton
Special to The Detroit News

Renault of France’s share price has been on the slide this year, not surprising for the number one investor in Russia’s car industry, but investors are still impressed with the company’s long term prospects as it relentlessly cuts costs, unveils more impressive new cars and banks profits from the Dacia low cost brand.

Renault, 14 percent owned by the French state, is the third largest auto company in Western Europe measured by sales with just over nine percent. VW of Germany is the leader with close to 25 percent, and Peugeot-Citroen of France second. Peugeot-Citroen is also owned 14 percent by the state. Ford Europe and GM Europe are just behind.

According to Moody’s Investors Service, Renault profits will increase over the next 18 months as the new little Clio city car and Captur small SUV sell well, helped by Dacias like the Sandero and Duster. Dacia low-cost brand vehicles are largely made in 3rd world countries using components from obsolete Renaults. The new Espace in early 2015, a new compact SUV mid-year, Laguna and Megane in late 2015, and Scenic in 2016 will at least carry on the momentum.

In the first half of 2014 Renault improved earnings before interest and taxes (EBIT) to 729 million euros ($903 million) from 583 million euros ($722 million) in the same period of 2013. (French companies only report profits every six months, not quarterly). Renault reported a 7 percent increase in revenue in the third quarter to 8.53 billion euros ($10.6 billion).

Renault’s first half profit margin rose to 1.9 percent, up from 1.1 percent in the same period of 2013 and Moody’s said this was weaker than global competitors like Ford.

In the first 10 months Renault-Dacia increased sales in Western Europe 14.3 percent to 951,400 compared with the same period of 2013, and increased market share to 9.3 percent from 8.5 percent. Dacia accounted for 255,900 sales in the nine months and raised sales 27.6 percent.

Moody’s raised its rating on Renault shares.

“Moody’s believes there are good prospects for further profitability uptick with the next 12 to 18 months that would narrow the margin gap with Renault’s global competitors,” Moody’s said in a report.

Moody’s reckons Renault’s four big advantages are:

• The incremental volume increase helped by a rejuvenated models and growing, albeit slowly, European markets.

• Higher margins expected from upcoming product launches.

• Additional cooperation with Nissan of Japan and Mercedes expected to yield higher production synergies.

• Further cost reductions, expected notably as part of the company’s competitive plan in France.

No mention of the 5 billion euro ($6.2 billion) electric car spending program which is slow to reap rewards, or the problems caused by Russia’s ailing economy.

Barclays Equity Research said problems in Russia had unfairly hit the stock price, which has fallen from close to €75 in mid-April to near €62 now, although the market there accounted for eight percent of Renaultsales and 23 percent including AvtoVaz.

“While volumes and foreign exchange volatility in Russia and Latin America are clearly a burden, we think the strength of Renault’s European franchise, in particular growth at Dacia, as well as an increased focus on partnerships both within the Nissan Alliance and also with competitors such as Daimler should drive growth in earnings going forward,” Barclays analyst Kristina Church said.

Church expected earnings momentum to continue in 2015.

“We expect volume gains to continue in 2015 as product renewals ramp up and Renault focuses on the increased profitability of new products. We were excited by the new Espace unveil at the Paris Expo — just the start of the 2015-16 product refreshes, which also include new C-Crossover, Laguna, A-entry for India, Megane, Scenic etc,” Church said.

Not everyone shares positive thoughts about Renault’s progress and a couple of months ago Bernstein Research analyst Max Warburton had this to say.

“We’re not convinced the French and broader European love affair with Dacia will be enough to offset emerging markets slowdown and deliver much more than mediocre second half and 2015 performance.”

But Moody’s latest report expects progress.

“Looking ahead, Moody’s expects Renault to continue to optimize its cost structure and productivity, mostly thanks to more integration with Nissan, which should help reduce manufacturing and logistics costs. Also, its upcoming model launches and continued cooperation with partners including Daimler will also raise capacity utilization in Europe and contribute positively to profits,” Moody’s said.

The Renault-Nissan alliance is believed to have invested the most in Russia and now controls 74.1 percent of AvtoVAZ, with some local partners. Renault-Nissan-AvtoVAZ has a market share of close to 40 percent, and plans to introduce new Lada, Renault, Nissan and Datsun models.