LONDON (Dow Jones)--European car markets may be highly competitive but that's no excuse for Peugeot to turn in such a wretched set of 4Q results.
Blame the 37% drop in FY05 net profits on cars and vans, and the fact that in a market that fell 2.9%, Peugeot's 4Q sales dropped 5.5% across Western Europe.
Worse, the outlook for first-half 2006 is little better and any chance of second-half improvement must rely on hopes for success of the 207 model coming to showrooms in late spring.
At worst, Peugeot has lost the plot and its downbeat view for the year ahead may not be prudent enough. At best, the 207 will, as Peugeot Citroen management clearly believe, reverse fortunes in the second half.
A company of this size shouldn't be riding purely on the hoped-for success of one model. At this stage of the model cycle and with so many of its cars and vans witnessing flagging sales, Peugeot should be building up for at least three new model launches to stop the rot.
At least Peugeot remains financially strong. And to be fair it has enjoyed more good years than bad in the last decade.
But despite a short-lived revival Peugeot's stuck in reverse. Sales, margins and profits are all down, highlighting the main problem: Peugeot must find a way to place far less reliance on Western Europe for its sales.
With ever-increasing competition from Toyota and Honda, the fast-reviving Volkswagen, not to mention Renault, Nissan, Ford and GM, the situation can only get worse. And since it lacks global scale, investors may see Peugeot's standstill as the start of terminal decline.
Relying on Western European for over 80% of sales is ridiculous. And what little growth Peugeot might foresee in other international markets, such as South America and Eastern Europe, won't be enough to make up for the weakness.
With GM and Volkswagen so well entrenched in China, one could be mean and argue that Peugeot's investment with partner Dongfeng Motor came far too late. The same could be said for investments Peugeot has made in Eastern Europe.
The medium-term goal of achieving 6% operating margins is surely a pipe dream. Margins last year fell a whole point to just 3.4%, and though the automaker continues with its cost-cutting campaign it must ramp this up over the next two years just to stand still.
True, Renault is hardly doing much better, but at least it has a forward plan of sorts.
In an ideal world Peugeot and Renault might accept that competing with each other is futile. Sadly, they both remain insistent on staying independent.
A merger with Renault, though, is just what's needed. Both carmakers have far too much industrial capacity in Western Europe, and a tie-up could prepare them better for the inevitable shakeout.
But until that day dawns chances are that Peugeot, Renault and a host of component-makers serving both automakers in France and elsewhere will struggle to achieve any semblance of growth.
(Howard Wheeldon was a senior equities analyst for 20 years, and has been a columnist at Dow Jones for the past three years. He can be reached at +44 207-842-9251 or by e-mail: firstname.lastname@example.org)
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