Share watch: Carmaker Renault testing French industrial policy
If you are to take investment in internationally traded stocks seriously, sometimes you have to sit down and empty your head of any preconceptions of what you may once have regarded as investment normality.
The traditional approach to share selection, namely picking a company that makes a product better and cheaper than its competitors, is suddenly neither as simple nor straightforward as it once was. The motor industry is a classic case in point.
Cars and trucks are technology machines. Silicon Valley looms large over the automotive sector under so many headings that it seeks to determine future consolidation, by reducing costs and competition in the industry. But consolidation is not a simple matter either. Especially in the case of the company we are putting under the microscope today, the French company, Renault.
If mega-mergers of any description are on the cards at Renault, you have to factor in the rather idiosyncratic French industrial policy. The French pay the merest 'lip service' to the free market.
Pepsi, a few years ago, was barred from bidding for Danone because the government deemed the food company a 'national' champion. Renault's rival Peugeot got €7bn from French coffers which was considered not a 'state aid' but an advance to Peugeot's finance arm. So hold fire on predicting any mega-merger involving Renault until you see the whites of President Hollande's eyes, no matter what Silicon Valley thinks.
Hollande's famous predecessor, Charles De Gaulle, and his post-war provisional government nationalised Renault because De Gaulle believed the management had collaborated with the Germans, a divisive issue even today. The company remained in state control for almost 50 years and wasn't privatised until 1996. In the following decade and a half, however, it sought to catch up with its private sector rivals.
At the beginning of this century, Renault purchased Dacia of Romania as well as a controlling interest in Samsung auto division. It also concluded a cross ownership arrangement with Nissan, paying $3.5bn for a 37pc stake and Nissan taking a 15pc non-voting stake in Renault.
The company has three brands: Renault, Dacia and Renault Samsung. It has a presence in 125 countries and 128,000 employees.
Sales last year were flat at €41bn but group operating income improved to €1.6bn. Its largest market is Europe with 60pc of group sales. France accounts for 40pc of the €25bn European sales. To rectify its dependence on Europe, Renault has a joint venture with the Chinese company Dongfeng due to start next year. In addition, it plans launching a new car in India which is being designed and engineered on the sub-Continent.
Last year's results beat expectations and the first quarter this year was strong and the company is on target for sales of €43bn. However, some analysts are concerned as to the emerging markets. Last year was also rewarding for Renault investors: shares, with a market cap of €28bn reached a yearly high of €100; five years ago they were €40 and they still hover in the mid €90s. While the Renault p/e multiple is a modest 13, Peugeot at this time might be a better bet.
Recently following a clash with Renault's CEO Carlos Ghosn (the only person managing two Fortune 500 companies) the French government increased its shareholding from 15pc to 28pc. This was to block any proposal that might lessen its control. Ghosn planned to allow Renault sidestep the so-called Florange Law which allows double voting rights to those owning shares for more than two years.
The action caused concern to both Renault and Nissan, who want to preserve the present balance of their alliance. However, the government won the day. To some investors, Florange is a flagrant disregard of the principle of one-share-one vote and argue the system will become the preserve of dominant shareholders. The government sees the law as a way of putting manners on hedge funds and short sellers.
Back to industrial policy, à la Française.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.