Still on its legs

Renault hit by adverse geopolitical winds

Renault's shrinking revenue in the third quarter at first glance seems to confirm the carmakers' unending problems. The French group reported a 3.4 per cent drop in automotive revenue that sent its shares down three per cent, even though the company is in better shape than the headline number suggests.

That is especially true when the auto maker is compared to loss-making French rival PSA Peugeot Citroen or to Italy's Fiat. Renault earned an operative margin of 2.9 per cent in the first half of the year. While lackluster in itself, measured by the standards of contemporary European mass-market manufacturers, this is not too bad. Renault's margin matches that of Volkswagen's non-premium brands. PSA and Fiat are still losing millions in Europe.

Renault did not release any earnings figures for the third quarter. Unit sales rose 3.1 per cent and the company was even able to push through some price increases. It also confirmed its operative profit target for the year.

But a carmaker doesn't operate in a vacuum, and Renault found itself hit by factors beyond its control. The weakening of emerging market currencies wiped out Euro 439 million or 5.7 per cent of revenue. Because of the economic sanctions against Iran, the group had to abandon the country, where it generated almost four per cent of its unit sales last year. Rising demand everywhere else made up for the loss. Unit sales in Europe jumped 10.2 per cent - four times as fast as the entire market, which has been in the doldrums for more than four years.

Renault still faces important challenges. The lack of real premium models hinders its earning potential. Its greater exposure to emerging markets makes it vulnerable to their slowing growth prospects. The spike in European sales may just be a blip - and in any case, the recovery of Renault's home market is likely to be slow.

The carmaker's share price has risen 90 per cent over the last year. According to Starmine data, it now trades at a forward price-earnings ratio of 7.5. This is a tad higher than better-positioned Volkswagen. Even if nothing else goes wrong, further upward potential appears limited.