France’s twenty-four hour Le Mans race is as much about a car’s endurance as it is speed. Gallic automaker Renault will need plenty of both to catch up with German rival Daimler. But the latter’s exposure to fast-recovering China means investors should give it more oomph.
The boss of the Stuttgart-based automaker, Ola Kallenius, can be satisfied with his performance so far. Sales in China rose year-on-year by nearly one-fifth during the third quarter bringing year-to-date revenue there up by 7% to 14.7 billion euros, a marked divergence to declines in every other major country. The V-shaped recovery in Mercedes-Benz cars’ largest market meant Kallenius trimmed the group’s year-to-date revenue decline to 14%, a deficit which could shrink further in the last three months of the year. Combined with tough cost-control, 2020 operating profit should be broadly in line with last year’s 4.3 billion euros – an impressive turnaround from the middle of the year when Daimler hoped to merely break even.
By contrast, Renault’s engine has been sputtering for some while. New Chief Executive Luca de Meo is at least heading in the right direction. A 8% year-on-year revenue decline in the third quarter was less than analysts feared. The fact it was mitigated by higher pricing vindicates a key plank of his turnaround strategy to focus on profitability rather than volume. A 3% sales shrinkage in Europe, compared to a 5% regional drop, suggests de Meo also took share in a market which accounts for roughly half of group sales. That gave him enough confidence to accelerate towards the modest goal of positive free cash flow in the second half, after suffering steep losses in the first six months.
De Meo’s target of 2 billion euros in cost savings by 2022, compared with 2019, should hasten Renault’s forward propulsion. Even so, Renault’s enterprise value is over 8 times its 2021 operating profit as forecast by Refinitiv-compiled data. Daimler is less than 5 times. That doesn’t give much incentive for investors to choose the French company over its German rival.