By Tom Pfeiffer
PARIS, July 22 (Reuters) - When demand for new cars falls, financially strong automakers like PSA Peugeot Citroen and Renault SA come into their own as they have more leeway than weaker rivals to cut prices and steal market share.
Both French manufacturers report first-half profits this week and analysts are wondering how much cash they abandoned to keep unit sales to support or boost sales as the European car market shrank 4.5 percent. But no one expects a slump in earnings.
Both firms are committed to tough profit targets and are cutting costs thanks to economies of scale as they shift automobile assembly onto high volume platforms.
"I don't think any looming disaster is overhanging these results," said Greg Melich, analyst at Morgan Stanley in London.
Renault and Peugeot are in strong positions, for very different reasons.
Under Chairman Jean-Martin Folz, Peugeot has discovered an unexpected flair for design which has drivers paying over the odds for flashy new models like the sleek Peugeot 307 and bubble-shaped Citroen C3.
The company has committed itself to posting 2002 operating profit of between 4.8 percent and 5.0 percent of sales at its automaking division.
Renault operating profits have slumped as its high-volume models age but the firm has promised it won't lose money in its core business this year, thanks to cost cutting and the introduction of two new large cars, the Vel Satis luxury saloon and the Laguna II.
Meanwhile the firm is reaping large sums of cash from a 44.4 percent stake in former basket case Nissan Motor Co after former Renault executive Carlos Ghosn took an axe to the Japanese manufacturer's cost base.
DIFFERENT OUTLOOKS
Renault is expected to report late on Thursday afternoon first-half operating profit of 521 million euros ($525.1 million), up from 304 million euros a year earlier, according to the average forecast of six analysts polled by Reuters.
The figure has been boosted by a switch to internationally accepted accounting standards which allowed Renault to shift new product development costs out of its operating expenses and amortise them as non-fixed assets over five years.
Management has told analysts that the the change will lift operating profit by about 700 million euros in 2002. Renault has said it hopes to reach its target of a full-year operating profit without including this artificial boost.
Renault sales are seen falling to 18.60 billion euros from 18.83 billion a year earlier, while net profit should come in around 682 million, down from 779 million. Nissan will boost net profit by 425 million euros.
The analysts expect Peugeot, whose core business is now far more profitable than Renault's, to post operating profit of 1.47 billion euros, up from 1.40 billion, and sales up 4.1 percent to 28.13 billion euros. Net income is seen at 892 million, down from 1.03 billion.
Peugeot reports its profit on Wednesday before share trading begins in Paris.
Chairman Folz said last month that tough market conditions in Western Europe could push profit margins this year to the lower end of its target range.
Renault hopes its profits will really kick in once its new Megane mid-sized car, unveiled with much pomp on July 2, hits the market this autumn, especially after a taller minivan derivative goes on sale next year.
"The outlook for both companies is different," said Melich. "For Peugeot the issue going forward is their effort to gain market share but also the cost reduction momentum as they roll out the new platforms."
"For Renault, people are first looking forward to the new Megane and how succesful it will be."
Morgan Stanley rates Peugeot "overweight" and Renault "equal weight".
Peugeot shares have fallen 6.2 percent this year after a 17 percent gain in 2001. Renault stock is up 6.5 percent after falling 29 percent last year.