Carmakers give hope for future
Jun 24 2009 by Iain Laing, The Journal
The problems of the UK’s carmakers are well known. Carmakers in the rest of Europe are finding the going tough too.
A comparison of BMW and Peugeot highlights some immediate problems, but also gives some hope for the future.
BMW continues to say it cannot give guidance on earnings for 2009, given the continuing economic and financial uncertainty. It is also unlikely to be a major beneficiary of European government schemes to boost new car purchases.
Recession-conscious consumers tend to go for smaller, cheaper cars – more Peugeot’s speciality. But BMW’s fundamental strengths mean it will be better able to capitalise on economic recovery on 2010 than the French producer, which is likely to see some sales brought forward by incentives. BMW will benefit from an increasing number of new models are due to launched from 2010 onwards.
We believe the US economy will lead the European economies out of recession. This should give BMW’s US operations – which account for 20% of cars sold – a chance to shine, after a difficult 2008 and 2009 to date.
BMW’s relatively aggressive use of leasing in this market forced extensive write-downs last year. These costs shouldn’t recur this year and recent signs (for example of US second hand vehicle pricing) are encouraging.
In contrast, Peugeot appears to be hunkering down for the long haul. Early this week, it announced that it expected to make an operating loss of more than £1bn this year.
Peugeot believes that government car purchase schemes will yield results: it reckons that European car sales will fall by 12% overall in 2009, compared with a previous forecast of a decline of 20%. However, the incentives carry medium-term risks for Peugeot as well as short-term rewards. We worry that pulling sales forward into this year will hurt sales volumes in 2010. Meanwhile, long-term problems of excess capacity will not to go away, and these are likely to hurt volume producers.
Peugeot has issued a $500m convertible bond to help with the general financing of the group, and the company has said it is not exposed to any liquidity risk over the next 12 months. However, cash burn will be an important issue for the Peugeot share price, with losses expected to continue into 2010, and the company’s need to repay a government loan.
BMW’s shares are also likely to prove volatile in coming months, being driven largely by monthly sales statistics and global macroeconomic news. But as its outlook is less distorted by incentives, the impetus given by new model launches, improving returns from a restructuring programme and, to date, a relatively robust cash performance, BMW is probably a better – if still risky – way to get exposure to recovering markets via auto makers in 2010.
Andrew Miller is regional office head of Barclays Wealth in Newcastle
