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Ghosn aura fades as Renault loses ground to rivals

From India Times| September 10 , 2007
PARIS: Renault shareholders are losing patience with chief executive officer Carlos Ghosn, who plans to revive profit at France’s second-biggest carmaker by introducing 26 new models by 2009. While the new Laguna hatchback debuts next month, the top-selling Megane compact won’t be updated until the end of 2008.

Fiat, the fastest-growing European carmaker, and Volkswagen are stepping into the gap, grabbing regional market share and outrunning Renault’s stock, which is down 0.6% this year.

“Renault knew it would be in a sales lull right now, but Fiat and Volkswagen weren’t expected to do this well,” said Matthieu Bordeaux-Groult of Paris-based Richelieu Finance, which manages $5 billion in assets including Renault shares and rates the stock ‘hold.’ Ghosn pledged in February of last year to sell 3.33 million vehicles in 2009, a one-third increase from 2005, and almost double operating profit to 6% of revenue. Vehicle sales at Boulogne-Billancourt, France-based Renault dropped 4% and earnings fell 15% in 2006.

“There isn’t much going on at Renault until the Megane launches,” said UBS analyst Max Warburton in London, who has a ‘sell’ rating on the stock. “The business looks to be on a pretty awful trajectory.” If it weren’t for Ghosn’s record, “people would be incredibly negative on Renault,” he added.

Renault’s shares also may be dragged down because of three straight quarters of declining profit at Tokyo-based Nissan Motor, which is 44% owned by Renault. Nissan, still led by Ghosn, accounted for almost two-thirds of Renault’s 2006 earnings and almost half the French carmaker’s market value. Nissan’s stock has declined 24% this year.

The difference in share performance between Renault and Nissan “presents a material risk for Renault shareholders since it doesn’t appear sustainable,” Sanford C Bernstein analyst Stephen Cheetham said in an August 10 note reiterating his ‘market perform’ rating. “The glory days of Nissan’s highly impressive turnaround under CEO Carlos Ghosn are long gone.”

General Motors shareholders showed confidence in Ghosn last year, sending the stock up 8.6% when billionaire Kirk Kerkorian proposed a GM-Renault-Nissan alliance that never materialised. Ghosn, 53, burnished his reputation as ‘Le Cost Killer’ after joining Nissan in 1999 and restoring it to profit as operations chief and later CEO. Renault is this year’s worst performer in the seven-member Bloomberg Europe Autos Index.

Volkswagen, Europe’s largest carmaker, leads the index with a 73% gain. Southeastern Asset Management Inc., which oversees $45 billion in Memphis, Tennessee, shed the 1.45 million Renault shares in its Longleaf Partners International Fund last quarter.

“We fervently hope that we can again partner with Carlos Ghosn, but are happy to part with Renault at our exit price,” Southeastern CEO Mason Hawkins said in his first-half report to investors.

Renault shares fell 4.05 euros, or 4.3%, to 90.47 euros in Paris, outpacing a 3% drop by the Europe autos index. The stock has declined 25% from its July 3 all- time high of 121.38 euros.

The automaker’s push into new markets, powered by its Logan family of low-cost cars, may offset a slower-than-expected sales recovery in Europe. Renault has said the program may become profitable this year as it rolls out in Brazil, India and Iran. Nissan and Renault announced plans September 1 for a 1 billion euro ($1.37 billion) Moroccan plant to assemble 2,00,000 Logans and other vehicles annually from 2010, mainly for export.

International expansion will ‘structurally lift’ profit margins well beyond 2009, Simon Davis, who helps manage $187 billion for Putnam Investments in London, including a stake of almost 1% in Renault, said in an interview. “Their product flow is going to be less cyclical, and they’ll be much less dependent on western Europe as a source of profit. If we’re right, then the shares remain substantially undervalued.”

Renault’s first-half share of Europe’s passenger-car market fell to 8.7% from 9.6% a year earlier on a 9.5% plunge in sales, according to data from the Brussels- based Association of European Carmakers. As Renault retreated, Turin-based Fiat’s market share rose to 8.2% from 7.6%, helped by sales of the Bravo compact.

PSA Peugeot Citroen, France’s biggest carmaker, inched up to 13.2% from 13.1%, buoyed by new vehicles such as the 207 small car and Citroen C4 Picasso minivan. Peugeot’s 308, a Megane competitor, goes on sale this month. Renault expects to halt its European decline by October, helped by sales of the Laguna — being unveiled next week at the Frankfurt Motor Show — and the Twingo II small car introduced in June, Ghosn told reporters last week in Austria.

The Megane Scenic van, the most profitable version of the vehicle, isn’t due until the first half of 2009, after the hatchback. The models arriving earlier include an updated Kangoo light truck, a station-wagon variant of the Clio subcompact and a larger version of the Modus minivan, whose sales fell 43% short of the 3,00,000-unit target in 2005, its first year.

“Renault’s first releases are in model categories that are either very tough to compete in or relatively unprofitable,” said Pierre-Yves Quemener, a Paris-based analyst with Kepler Equities Landsbanki, which has a ‘reduce’ rating on the stock.

Adding market share ‘would be a challenge,’ he said, because of ‘regular market-share gains’ by Toyota Motor and a sales revival by Volkswagen, which introduces its sixth Golf compact next year.

Renault, 15% -owned by the French government, is running at 70% of capacity in its western European plants, the company says, compared with Peugeot’s 92%. While Paris-based Peugeot closed a UK plant and ended 14,800 European jobs in the past two years, Ghosn said August 29 that Renault has no plans to shut factories or cut headcount.

The contrast with his belt-tightening turnaround at Nissan reflects “formal and informal political constraints” on layoffs in France, said UBS’s Warburton. Using only 70% of manufacturing capacity is normally “not something you boast about,” he added.

Other investors, less willing to wait, may follow Southeastern’s lead. Morgan Stanley analyst Adam Jonas in London, who rates Renault as ‘underweight,’ said the drag from Nissan’s lower earnings will take a toll before any progress in emerging markets.

“We’re concerned that many in the market apply too much emphasis on drivers such as the Logan,” Jonas said in an August 10 note in which he cut his 2007 earnings estimate by 6.8% to 9.65 euros a share. He expects the stock to fall to 75 euros.

Ghosn ceded daily oversight of Nissan’s North American operations in March after the automaker said it would miss its full-year earnings forecast. If the turnaround needed at Renault — and now Nissan — doesn’t come quickly enough, he may face calls to reduce his role again.

“The near term looks weak, and we remain concerned that Carlos Ghosn is still running both Renault and Nissan,” Bernstein’s Cheetham said. Commuting 6,000 miles by air between two CEO jobs “is a tall order for any human being.”

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