Renault Riding High On Recovery

French automobile manufacturer Renault (RNO:FP),(RNLSY) is Europe’s third largest automaker focusing on all aspects of the car life cycle from design and conception, to marketing and repair of light vehicles, both commercial and passenger. The company has been riding high since it released earnings in February, bolstered in part by European growth clocking in at the fastest pace in years. Renault is boosted further by its strategic alliance with Nissan which has been a strong addition to the company’s bottom line. Renault’s global presence, exposure to emerging markets, and backing make it an especially strong competitor as they increasingly fill the budget automobile and small car space that has been growing rapidly. 

The Fundamental Picture

Renault on the whole is a very solid company from a financial standpoint with strong operating margins in the automotive space. The EUR 27.95 billion market capitalization is only small aspect of the company’s worth considering the price-earnings multiple and dividend yield. Auto sales have kept increasing on an annualized basis for each of the last three months measured, with February touting gains of 9.80% additional registrations, 10.50% in March, and 15.30% in April. The company is increasingly gaining market share in the competitive European auto market with registrations climbing 11.60% year to date. 

Renault is specifically focusing on emerging markets as a way to tap into rising standards of living and greater per capita incomes by introducing lower cost car initiatives, like the ultra-cheap Kwid model to be launched India.  Aside from the activities in India, Renault is planning to start production in China in 2016 in an effort to grow margins and generate revenues from current non-core markets, mainly emerging economies. However, the company has not been without headwinds with sales falling across South America and other losses, mainly from the investment in Russian automaker AvtoVaz. Russia is projected to see a 25% decrease in deliveries over 2015 owing to the difficult economic conditions faced by consumers. 

On a longer-term basis, Renault has delivered solid gains over the past few years with share pricing more than tripling over the last three years. Much of these gains come from the strategic partnership with Nissan which contributed nearly half a billion dollars in earnings to first quarter earnings for Renault. The company, which owns a 43% stake in Nissan developed this partnership in the wake of a rescue of the Japanese company orchestrated in 1999. Nissan presently holds a 15% stake in Renault. However, it is notable considering that Nissan outsells Renault 2 to 1, contributing to over two-thirds of the group’s total vehicle sales and nearly 80% of profits. 

Ownership is a troublesome issue for the company, angering certain shareholders after the French government raised its stake to protect its double voting rights versus the Nissan holdings which are entitled to no voting rights. This is a boon for long-term shareholders, but a troublesome situation from the company’s perspective as it increases the government’s role in the company and its governance vis-à-vis voting rights.  From a shareholder activism perspective, this means the smaller shareholders have reduced rights and limited freedom to help determine the future of the company.  Stakeholders outside the government are set to lose their influence which is worrying from a rights perspective as it gives the government the last word on any shareholder initiatives.

The Technical Take

Since releasing 2014 earnings on February 12th, Renault has been steadily trending higher.  The gap higher seen in the session after the earning statement should be considered a strongly bullish indicator.  Bolstered by stronger European car sales and benefits from the strategic partnership with Nissan, the shares of Renault have been trading within an equidistant channel pattern in the medium-term, forming since the announcement.  With share prices now approaching the lower channel line, there is a strong possibility of prices reaching a great entry point on the long side for positions to be closed at the top of channel.  However, should the situation in Europe change materially due to the unfolding events in Greece, equity valuations across the Euro Area could be dented by a negative outcome.  Nevertheless, these factors are presently being offset by the quantitative easing program which has been driving shares across the region higher as sellers of European sovereign debt turn around with the proceeds and invest largely in equity instruments. 

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On a longer-term basis, the shares are trending higher, having experienced a technical correction for the better part of 2014.  Starting in August of 2014 and ending in January of 2015, a head and shoulders bullish pattern setup paved the way for higher prices, breaking above the crucial EUR 71.25 level that previously served as important resistance. The latest leg in momentum higher does look to have continued room for appreciation considering the strengthening outlook for European car sales and launch of the budget car in India. This means the potential medium-term entry point on the lower channel line might prove a promising value if shares continue to trend higher and appreciate on the back of fundamental factors that have driven the valuation higher in recent months.  However, should prices break below the lower channel line, this could be indicative of a potential correction and reversal lower to be accompanied by increased volume and momentum.

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Conclusion

The company’s dividend and increasing sales in Europe make it positioned for further upside, especially with the benefit of tailwinds from the European Central Bank’s accommodative policies which are helping the lending market rebound.  While obstacles are in the pipeline due to a pullback in emerging market sales namely in Russia and Latin America, the company is forging ahead with expansionary policies which will bear fruits down the road when these very economies begin to recover.  Focus on increasing margins and maintaining the dividend make Renault a true, longer-term value holding.