EU carmakers face reality check
European carmakers have put on a brave face and fared better than their US counterparts but a reality check looms as surging fuel and raw material prices put earning forecasts at risk.
Analysts say France's PSA Peugeot Citroen and Renault could miss their operating margin targets, forcing them to either trim targets or boost cost cutting, possibly as part of mid-year results due this month.
"It's unrealistic to assume that Renault will achieve its original guidance," said Pierre-Yves Quemener, head auto analyst at Landesbanki Kepler.
"The chances of "commitments miss" are growing week after week as cost inflation bites each time deeper and as the macro environment is depressing volumes."
PSA and Renault, Europe's No 2 and No 6 makers, have declined to comment ahead of their mid-year results.
Sergio Marchionne, CEO of Fiat, which ranks fifth, has stood by his group targets.
"Despite what is happening, we are not only keeping our 2008 profit and cash flow forecasts, but we confirm those for 2009," Marchionne told a conference this week.
But in a year when the price of oil is up 45%, some steel prices are up 50% and other raw materials such as aluminum have also surged, assumptions and forecasts are proving hard to hold on to.
"We're looking at it day by day and while we remain optimistic and keep doing our best, it is clear that the market environment has changed to the worse and many warning lights have gone to orange from green," one car industry source said.
JD Power Automotive Forecasting on Friday cut its 2008 forecast for western Europe auto sales to a drop of 4%.
"Costs are rising and demand is dropping fast, it's getting very difficult indeed for carmakers," said J.D. Power analyst Jonathon Poskitt.
Volkswagen, Europe's biggest carmaker by sales volume, has already acted, announcing last month that it would boost its cost cutting plans to offset higher raw materials.
The carmaker has an average 2008 price earnings multiple of 14.7, twice the average for European carmakers of 7.3, according to Reuters data. PSA trails the pack at 5.4 times.
Volkswagen has relatively modest goals for 2008, aiming to improve on both sales and operating profit over last year.
The consensus of 26 analysts sees its revenues rising 3.4% and its EBIT up 10.7%. Analysts are less convinced about second-ranked PSA Peugeot Citroen.
Chief Executive Christian Streiff has set a margin target of 3.5% for 2008 and 5.5-6% in 2010.
But the average of 19 analysts shows they expect a 2008 margin of 3.38% and 4.4% for 2010.
At Renault, CEO Carlos Ghosn has a 2008 target of 4.5% and 6% next year.
Again, analysts are less optimistic, with the average forecast from 21 analysts showing they expect a 2008 margin of 4.3% rising to 5.3% in 2009.
Europe and BRIC countries
The strategy to safeguard margins and sales has been similar among the top makers, with a focus on new model launches, outsourcing to low-cost manufacturing centers and a push into the rapidly growing economies of Brazil, Russia, India and China.
Without exception they are seeking to cut costs by making plants more efficient and adding capacity in lower-wage countries where they are also buying more parts.
But price rises have moved more swiftly, with oil nearing a record $150 a barrel hitting demand for new cars, and production costs soaring as carmakers pay more for steel, aluminum and copper.
For makers including Mercedes maker Daimler and BMW, concerns also include a strong euro eating into margins on exports to the key markets for their luxury models such as the United States, Japan and China.
They are also under pressure to step up efforts as their relatively powerful vehicles fall foul of increasingly tough taxation on CO2 emissions.
Europe's makers also must contend with negative spillover from souring investor sentiment hitting Detroit's Big Three - Ford, GM and Chrysler - as car sales hit 15-year lows.
The Dow Jones Stoxx Auto index .SXA has shed almost a third of it value this year and is at its lowest level since August 2006.
Rating agency Fitch said recently that the focus for the credit profiles of Europe's carmakers remains on how they weather the downturn at home.
"Although the strategy to look for growth in emerging markets has largely paid off in recent years and should remain profitable in the long run, a prolonged or accelerated sales decline in western Europe may still ultimately weaken the credit profiles of car manufacturers," said Emmanuel Bulle, senior director in Fitch's European Corporates group.