The Renault case has already been discussed here twice (here
). Recent developments, however, naturally lead us to revisit the file.
First observation: a possible infringement of Japanese tax laws by Mr. Ghosn doesn’t have anything to do with the results or the financial situation of Renault.
Second observation: in an industry that is as tough and competitive as the car business, there are only two survival strategies - position yourself in a luxury segment with high margins, or compensate smaller margins with large volumes and economies of scale; as such, it would be surprising for Nissan or Mitsubishi to jeopardize the alliance that links them to the French manufacturer since their survival seems indexed to the sustainability of the latter.
Third remark: while Renault shares already were surprisingly affordable - like the shares of all car manufacturers, by the way, like BMW which we featured here last week
- since the 19th of November the company’s shares are extraordinarily
And indeed, without falling into a sophisticated financial analysis or sum of the parts, we note that the market capitalization of the group (17 billion euros) represents a multiple of 3.3 times last year’s profits (5.1 billion) and a 50% discount on the company’s equity (34 billion) which is, however, profitable for the long cycle.
These kinds of valuation levels are usually reserved to companies which are in a near bankruptcy situation. Renault seems light years away from such a thing: the company is remarkably well-capitalized - Mr. Ghosn liked to unburden himself from the terror the last big crisis left him with - and since the company has been growing sustainably for ten years - at an annualized pace of 5% - the group has considerably improved its margin profile during that period and generates excess cash every financial year.
Nissan, owned by Renault for up to 43.7% of its capital, also displays a satisfying financial performance, with a 4% annualized turnover growth since 2008 and a record net margin for the last two financial years.
The profitability of the equity straightened out over that period approaches 10% - more or less the cost of capital among discerning investors. That being said, selling said equity for 50% of its accounting value - which without a doubt underestimates the value of the company’s stake in Nissan - appears overly conservative, or unreasonable when we talk about a profitable company that’s well managed, and that thanks to its Alliance disposes of a formidable competitive advantage - meaning its scale.
The car industry, as we regularly remind our readers, is as tough as it is ungrateful because it’s cyclical, extremely competitive and incurably capital-intensive. The quality of the profits in this industry is questionable and the opacity of the financial services divisions - although essential in the consolidated financial performance - is more or less absolute.
Moreover, Ghosn’s fall strikes hard: closely monitored by fussy boards in Japan and Europe, the compensation of executives - direct as well as indirect, benefits in kind included - normally is transparent and well documented.
That such a case comes to light looks just like a palace revolution, and creates the fear for potentially deeper than expected tensions between Renault and Nissan.
A reconciliation will require compromises: let’s hope that they will be found soon by the concerned parties.
In the case of Renault, all these real risks - which we certainly don’t deny - are more than integrated into the price. So, without looking to sketch an exact valuation, it seems that an investment at this price is limited to going against a maximum pessimism of the market.
The situation should thus spark the interest of contrarian investors, focused on the long-term and detached from the media fury.
(The author is a shareholder at an average price of 56 euros.)
Article published on 11/21/2018 | 17:41