Headquartered in Paris, PSA Peugeot Citroen (UG.PA) is the second largest automaker (after Volkswagen) in Europe and eighth-largest in the world by unit sales in 2011. The company trades as ADR on the Pink sheets. The Google finance link to the quote is PINK:PEUGY.
Current price $12.6
A brief history of the group in in order. Peugeot acquired 38.2% of Citroen in 1974 and two years later increased the stake to almost 90% when Citroen was near bankruptcy. In late 1978, they purchased Chrysler Europe for $1.00, assuming the financial debt. This led to loss for the firm from 1980 to 1985.
In October 2011, Peugeot announced it would shed 5000 jobs as a cost-cutting measure as car sales declined. On Feb. 29, 2012, GM announced that it is buying 7% of the company. This alliance is intended to save almost $2 billion per year through sharing platforms, common purchasing of goods and other economies of scale.
GM had a loss of $747 million in Europe last year but despite tough conditions Peugeot made a profit of €588 million.
PSA owns 57.43% of automotive supplier Faurecia. Faurecia provides components for Peugeot and Citroen and significant interior and exterior parts for BMW, Audi and Mercedes. It is one of the largest automotive suppliers in the world (ranked seventh globally in terms of sales).
Gefco is an international logistic company, wholly owned by PSA. It provides reliable and competitive solutions on behalf of distributors to safely deliver vehicles. In 2010 it distributed nearly 2.7 million vehicles. In the same year, it had revenue of €3.35 billion and operating income of €198 million.
PSA wholly owns Banque PSA Finance, which provides financing for sales of Peugeot and Citroen brands in 23 countries worldwide. It offers solutions for retail and fleet customers as well as dealers.
Unlike many other vehicle manufacturers, PSA operates only two brands: Peugeot and Citroën. The Peugeot brand offers vehicles that are more “conservative”, “stable” and “reliable”, while the tagline for Citroën is “creative” and “bold”. The brands retain separated sales and marketing structures but share common technology, development and assembling plants.
Citroën is an upscale brand while Peugeot concentrates on the mass market. This focus I find advantageous as other competitors like GM, Volkswagen and BMW have been increasingly distracted by too many brands. In spite of this concentration PSA produces vehicles that compete in every niche of the auto market, except maybe the luxury and performance vehicles.
PSA seems to be committed to growing its market presence in many fast-growing developing countries in the world. It has made big investments in, for example, South America (market share 5.4%), Russia (market share 2.8%), China (market share 3.4%). It has also invested in Iran (Iran Khodro) and India (Sanand, Gujrat).
3.1 Supervisory board
There are many a good things to be said for the management of Peugeot. As in many companies, the supervisory board has an oversight over the management board. The chairman of the supervisory board is from the Peugeot family and by all accounts takes his job very seriously. Some of the examples of the supervision they have done is as follows:
- Jean-Martin Folz, who was CEO between 1996 and 2007 was replaced by the former Airbus head Christian Streiff. He was sacked on March 29, 2009, a day after the company posted a full-year loss for 2008. Streiff was replaced by Corus Group CEO Philippe Varin. The management was not exactly clear about the reason for firing him. They vaguely commented that the board “felt” that a change at the top would help the company.
- The CEO or the members of the managing board will get no compensation in case of termination, for whatever reasons. The last CEO got nothing, and this one will not get any severance pay either.
- The company paid out no options to its managing board in 2009, 2010 or 2011. The options granted in 2007 and 2008 are subject to lock-up rules and are prohibited from hedging.
- The only other benefit provided to the managing board is the company car.
- When the management decided to go for new public offering of the PSA shares, they fixed a price of €8.27 per share. This offering was only for shareholders of the PSA. This was much better for the existing shareholders than an open offering in which the existing holders would have suffered.
Increasingly, I find that greed and performance-oriented pay leads to eschewed reporting and further reduces shareholder returns. The compensation practice at Peugeot seems to be a lot better than at, for instance, Ford (NYSE:F). The salaries have a fixed component and a variable component. The variable component or the bonus is fixed at the beginning of the contract. For example, the chairman of the managing board Philippe Varin will receive 0%-150% (this it seems is fixed every year by the supervisory board) of his fixed remuneration of €1.3 million as bonus.
The compensation of the supervisory board is decided by the shareholders and it is set to a total amount of €600,000 until further notice. This means that the whole of the supervisory board cannot be paid more than that. The chairman of the supervisory board (Thierry Peugeot) is not included in this group. He was paid €425,000 in 2010. In 2011, the board has decided to put forth a proposal to increase the total compensation for the supervisory board to €1 million and the chairman’s compensation to €550,000. This proposal will be put forth in the next annual general meeting and will likely pass, given the strong position of the Peugeot family in the supervisory board and the shareholding of the Peugeot group.
If one looks at the outstanding options the management owns, we see that they are all underwater and the management will be leaving a lot of money on the table if the stock price does not appreciate.
|No of available options||1,004,000||943,000||983,500||1,155,000||1,345,000|
|Last excercise date||23/08/2012||23/08/2013||23/08/2014||23/08/2015||23/08/2016|
|Exercise price (in euros)||47.59||52.37||41.14||60.43||33.08|
3.3 Managing board
In 2007, the then-CEO Christian Streiff gave a very forward-looking presentation to the shareholders. It is the objectives that PSA wants to achieve by 2010.
The numerical targets that we can check:
- Sell 4 million vehicles in 2010 (3.6 million sold in 2010)
- EBIT margin of 3% for Faurecia (3.2% in 2010)
- Operating margin of 5% for Gefco and strong growth (€198m operating income on €3,351 million revenue, which is 5.9%, the growth has been more than 12% in 2011)
- Challenge: keep R&D and capex within 8.5 to 9.5% of sales (€4.8 billion in 2010 on sales of €41.4 billion, a bit above 10%)
- Expand in Brazil, China, Russia and India (also achieved in large part).
They also want to become the most competitive car maker in Europe. "Competitive" is defined as having the highest performance for a given cost or the best cost for a given quality and performance level. This will be terribly difficult to measure for obvious reasons.
From what I show above, including more than 30% holding by the Peugeot family, this is one of the best managements I have seen in a while.
Peugeot has been a family-owned business. The Peugeot family owns 30% of the company stock and 46% of the voting rights. Employees hold another 3% of the shares outstanding. These figures are from the 2010 annual report. With the recent GM deal, the shareholding structure will change but we will only know the exact figures in the next interim report.
4.2 Stock performance
The stock price has suffered a lot in the last year. The 52-week range for the price is €32.31 to €9.7 and the stock is currently trading at €9.70 (52-week low, $12.8 for the ADR).
5 Financial strength
It is a bit difficult to judge the balance sheet of PSA. The problem stems from the fact that PSA completely owns the financing bank PSA finance. As we know, banks are very difficult to comprehend. Our task is but made easier here because PSA finance only finances PSA vehicles.
First we will look at the automotive division and see the situation of the balance sheet.
|Items (in € million)||31 December, 2011||31 December, 2010|
|Investment in comp. at equity||1,410||1,002|
|Non-current financial assets||1,035||796|
|Other non-current assets||445||333|
|Deferred tax assets||1,370||419|
|Total non-current assets||25,286||22,646|
|Current financial assets||265||306|
|Total current assets||16,550||19,710|
|Non-current financial liabilities||7,639||8,259|
|Other non-current liabilities||2,865||2,772|
|Deferred tax liability||984||490|
|Total LT liability||12,184||12,225|
|Current financial liability||2,210||3,357|
|Total current liability||18,849||19,342|
We see that the LT debt of the company is €7,639 million. The company has €5,190 million in cash and it earned €794 million in 2010. So, the company is quite comfortable in covering its interest expense of €245 million. With the current new offering of €1 billion in new shares, the balance sheet has further improved for the better.
With a debt-to-equity ratio that is currently standing at 23%, I feel very comfortable in the financial position of the company.
Coming to the bank, we first explain the model. The bank gets its money from capital markets and other banks. At Dec. 31, 2011, 19% of financing was provided by bank facilities, 59% by the capital markets, 18% by loan securitizations and 4% from public sources such as SFEF (the French State-sponsored liquidity provider that was established during the financial crisis).
At Dec. 31, 2010, these sources provided 22%, 55%, 16% and 7% of our financing, respectively.
It then uses these funds to finance vehicles for individuals and corporate dealers. Banque PSA Finance provided financing for 27.8% of the new cars sold by Peugeot and Citroën dealers in 2011 (the share was 27.2% in 2010). It also offers service and insurance contracts.
As of Dec. 31, 2011, we had €24,314 million of outstanding customer loans and receivables, including €17,474 million end-user loans and leases, and €6,840 million of financing loans for Peugeot and Citroën corporate dealers. Our net banking income in 2011 was €1,032 million, our operating income was €532 million and our net income attributable to the parent was €345 million.
There is nothing out of ordinary at the bank. The bank does not do risky things and is very conservative. Nothing flashy is going on behind the scenes. The risk is that the people who buy a car do not pay up.
Apart from the obvious risks of the economy going into recession there are some specific risks with PSA that we need to discuss and keep out eyes on.
Government regulation and political problems
As part of its growth strategy PSA has chosen emerging economies like China, India, Brazil, Argentina, Chile and so on. A full map of factory locations have been shown in the figure below.
The emerging markets are still in development stages and the operations have not been fully functional at many places. For example, the €650 million plant in Sanand, India is set to be operational in 2014. PSA has no brand name in India but it should not be a big problem in generating a name by advertising. Volkswagen for example recently launched a big ad-campaign in India and now is known by a large part of the car-buying population.
But emerging economies also pose many problems for fledgling businesses. The recent closing of PSA’s Iranian operations is one such example. Exports to Iran accounted for nearly 13% of global sales of PSA and is the second-biggest market for PSA by volume. The recent sanctions against Iran are part of the reason.
Concentrated sales in a shrinking market
PSA’s main market is Europe. It generated 58% of sales in Europe (2011) and has a 13.3% market share (compared to 14.2% in 2010). Out of this, France represented 34.5% of the sales. Automobiles in France and in fact, Europe, is a matured market. On Feb. 16, 2012, Moody lowered the vehicle market growth forecast to negative 6% from a previous forecast of a flat market. This means that the manufacturers are fighting for share in a shrinking market. With so many companies manufacturing vehicles, the competition is not going to be pretty.
Increasingly, the government has been playing an instrumental role in business decisions. Given that auto manufacturers are big employers, the government tries to keep them happy but also forces them to keep running factories even when they are at a loss. PSA, for example, had similar issues. Reuters reported the following on April 6, 2012:
A Peugeot internal document leaked last June outlined plans to shutter Aulnay, which employs 3,500 people, but stipulated that no announcement could be made before the elections.
Five out of seven trade unions walked out of stormy talks with state and company representatives on Friday, the CGT's Jean-Pierre Mercier said, with no concrete progress made.
Another recent issue has been the disparate increase in servicing/maintenance charges of cars in France. PSA and Renault have been raising prices for maintenance of vehicles to offset some of the loss in profits because of decreasing sales. The spare part business has been a source of good profitability but the Autorite de la Concurrence, France’s main antitrust body, has wised up to this. In a recent finding it said that even after inflation the maintenance prices rose 28% as compared to 10% in Germany.
The market hates uncertainty. But uncertainty is not the same as risk of losing capital. As value investors, we strive to limit our capital losses in the worst case.
The diluted total number of shares is 222.7 million. The company made a profit of €2.56 per share in 2011. Given the current share price, the market thinks that the company is worth less than €2.7 billion. Is this warranted? Furthermore, is the drastic change in the value of the company warranted?
|Assets (in € millions)||2011|
|Total LT assets||25 628|
|Total current assets||43 463|
|Liability (in € m)||2011|
|LT debt||7 639|
|Total LT liability||12 553|
|Current liability||41 944|
|Total assets||68 991|
So, we have a company with TBV of more than €7.4 billion selling for €2.6 billion. Furthermore, in my superficial analysis, the company is managed by the Peugeot family quite actively. The management pay structure is quite good. And the company is quite profitable.
After due diligence some new details come to light. Peugeot on March 27 announced that its new financing is complete. The stock sale was reserved for only existing shareholders and was done at €8.27 per share. GM is paying €304 million for a 7% stake. After the stock sale the family will hold 25.2% of the share capital and 38% of the voting rights. The capital increase was of total €1 billion.
There is no official information about the capital increase on the website, which is a bit surprising. Given that I have a lot of information from Reuters and Yahoo! Finance, I will calculate the new share count myself. To raise €1 billion, the company would have to issue 121 million shares. This with 223 million shares from before makes the total share count 344 million. At €9.6 per share, the market cap is €3.3 billion. Given that this €1 billion will directly be added into the TBV, we have a company selling for €3.3 billion with TBV of €8.4 billion. This is still a 100% margin of safety.
In December 2011 the net debt of the company was €3,359 million and the projected pension obligation was €105.3 million. The company has decided not to put the pension obligation on the balance sheet. The EV of Peugeot is currently €7.7 billion (market cap = €3.3 billion, net debt = €3.4 billion, pension obligation=€105 million, new offering=€1 billion). The company has sales of €59.9 billion, TBV €8.4 billion and EV of €5.7 billion. The FCF in 2010 was €1.1 billion. The company is a consistent generator of cash and if we put this together, the company is very cheap on several metrics.
Additional disclosure: I have 100 shares of Peugeot at €9.7.