Volkswagen’s Problems Aren’t Renault’s
Investors could do worse than buy into Renault’s recovery
Renault dedicated a total of zero slides in its annual results presentation to the emissions questions that have hit its market value this year. But when charged in question time with avoiding the politically sensitive subject, Chairman Carlos Ghosn let slip an interesting number: €250 ($283).
This is the cost per car of a technology the French manufacturer is working on to meet the next wave of “Euro 6” emissions norms.
To put that in context, Renault made an operating profit per car of €534 last year, excluding financing profits. This works out as a 3.5% margin.
The company spent more than twice that—€1,113 per car, up from €1,006 in 2014—on research and development to keep ahead of both competitors and emissions regulators.
The latter are a particular focus after January’s high-profile police raids at Renault factories. These found no evidence of fraud such as U.S. regulators discovered at Volkswagen last year. Instead they shifted political attention onto the well-documented disparity between the results of lab-based emissions tests and those found in road tests.
Mr. Ghosn fumed Friday that road tests were a “Pandora’s box”, because different driving styles lead to different levels of emissions. But they are coming: the European Parliament passed a law in February requiring European cars to undergo some form of road-based check as well as stricter lab-based ones, albeit probably not before 2019.
The combination of wafer-thin margins and vast R&D bills helps explain why investors don’t pay up for European volume car manufacturers. Even as the European car sales recovery reached fever pitch last year, Renault’s stock never traded on more than 10 times forward earnings. It is now valued about 5.5 times, according to FactSet.
Yet those who can get comfortable with the automotive industry’s legendary cyclicality and dubious economics could do worse than buy into Renault’s recovery story.
Net income rose by almost half last year, as 10% volume growth in Europe offset problems in Russia and Brazil, and margins beat expectations. The European rebound is slowing, but car sales on the continent—which accounts for almost three in five cars sold by Renault—remain about 13% below the 2008 peak. This year the group also has 10 product launches, which are typically a catalyst for market share gains.
And Renault’s shares are cheap, even by the industry’s standard. The Euro Stoxx Autos & Parts index trades on a forward price/earnings multiple of seven times. As the U.S. cycle shows signs of peaking, the company’s bias toward Europe surely no longer warrants a discount.
The problem of road-testing is the same for everyone, even if Renault has emerged as its reluctant flag-bearer. Look past the headlines and the group is firing on enough cylinders to justify a rerating.