By Rebecca Harrison
PARIS, June 18 (Reuters) - Shares in French carmakers PSA Peugeot Citroen and Renault have swerved past European rivals this year thanks to scant exposure to a weak dollar and solid business models, but slack sales and swelling valuations may soon bring the winning streak to an end.
Both stocks became defensive plays amid generally dreary reports about high oil prices and stuttering economic growth, as German peers like Volkswagen suffered from the added impact of a weak U.S. dollar on export earnings.
But analysts reckon PSA is now fully valued with no new model launches to bolster its anaemic top line, while Renault may also be past its peak, even if the promise of a smart new boss could keep its stock chugging higher for longer.
PSA , a former sector star that fell from grace last year with a double profit warning, has jumped 15 percent since January and hit a 22-month intraday high in late May.
A host of rating upgrades from major brokers spurred momentum and analysts hailed anew the company's cost-cutting record, solid balance sheet and minimal dollar exposure, winning back investors after last year's earnings fright.
"We felt earlier this year the PSA stock price was not reflective of the quality of the underlying earnings," said Graham Phillips at UBS. "PSA has a unique business model with outsourcing of niche products and is very efficient."
However, analysts note sales in some of PSA's most profitable markets like France and Germany have fared worse than expected and argue that bar the new 407 saloon, its ageing product line-up is unlikely to get much snazzier before 2006.
"The shares have done very well but there has been no earnings improvement, so I think they will pause for breath," said Phillips. "Their model and country mix is not strong and there are no new catalysts."
RENAULT REVS AHEAD
Shares in Renault, this year's industry darling thanks to high-profile product launches and the imminent arrival of golden boy Carlos Ghosn as Chief Executive from Nissan , have gained 10.6 percent this year versus a 5.5 percent sector average.
Analysts are divided over when Renault shares -- which they say are trading at roughly 5-6 times earnings per share and are cheaper than PSA and all its sector peers except crisis-stricken Fiat -- might be near the end of their rise.
Stephen Cheetham at Sandford C. Bernstein argues the stock is still expensive compared to its historical performance. He says expected cost-cuts and efficiency gains from the Ghosn effect are already priced in and that even at the near-zenith of Renault's product cycle, profit margins are weedy.
Renault last year launched revamped versions of its Megane and Scenic key models and despite robust sales, its market share in Europe is falling. While it hopes to improve profitability this year, its 2003 auto business operating margin was below PSA, stripping out the impact of different accounting measures.
"The Renault story has run its course and I think people are over-estimating Ghosn when they say he can change the way business is done in France overnight," said Cheetham, who rates the stock "sell".
Other analysts reckon Renault shares could stick to an upward curve for some time, spurred by strong first-half earnings, the launch of its new mini multi-purpose vehicle -- the Modus -- this autumn and of its revamped Clio next year.
Its agressive push into new markets with a cut-price sedan for developing countries and the imminent launch of its strategy in booming China could also continue to score points with investors, and some analysts are betting on Nissan raising its dividend later this month.
"We think Renault will continue to benefit from strong trading conditions in overall difficult markets with solid performance from all variants of Scneic and Megan," said J.P Morgan in a recent research note.