Impressive first-half numbers inspire confidence in PSA’s merger with Fiat Chrysler
By guest author Steven Wilmot from Wall Street Journal
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, PUGOY, which is in the process of merging with Fiat Chrysler FCAU +1.41 % to become one of the world’s largest car makers. On Tuesday, July 28, 2020, 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 July28, 2020, 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.