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European carmakers’ comments on outlook will be closely scrutinised when they report half-year results in the coming days, as investors attempt to look beyond the effects of scrapping schemes for signs of a real recovery. Carmakers may be able to send out a fairly upbeat message on cash, Oddo Securities analysts said in a research note.

Manufacturers, who were caught out at the end of last year and forced to slam the brakes on production, have been closely monitoring their unsold vehicle stocks. But profitability, cash and debt will play second fiddle to comments from executives on their expectations for demand and production for the rest of 2009 and next year.

Investors will be looking for signs that Renault <RENA.PA> and Nissan <7201.T> Chief Executive Carlos Ghosn was being overly pessimistic when he said earlier this month that 2010 would be as difficult as 2009 for the industry, which has been rocked by an unprecedented sales slump. [ID:nLA372224]

“Good numbers will be treated with a degree of scepticism if there isn’t an associated optimistic outlook. And the outlook needs to be optimistic not based on costs but rather on revenues,” Nomura International industry specialist Michael Tyndall said. Tyndall noted that while Italian carmaker Fiat <FIA.MI> — which reported first half results last week — beat forecasts, its shares fell.

“The market is not interested in things that it doesn’t perceive as sustainable. The market thought (about Fiat) ‘good numbers, but we’re not so sure about the rest of the year or next year’. I think the market is looking for sustainability,” Tyndall said.

SCRAPPING BOOST

Half-year results for makers of small cars will reflect the success of scrapping incentive schemes in major European markets, designed to encourage drivers to trade in old cars for new. Premium carmakers’ results — BMW is due to report its first half results on August 4 — will show a clearer picture of real demand.

Carmakers like Renault, PSA Peugeot Citroen and Volkswagen, which are celebrating a sales boost from scrapping schemes, may have to face up to a negative consequence on their profitability, Oddo Securities analysts said in a research note.

“The various government incentive schemes have boosted sales of small cars. This has resulted in a sharp deterioration in groups’ product mix, thus significantly squeezing their profitability.”
Germany’s Daimler <DAIGn.DE> — which includes the premium Mercedes brand, as well as the compact Smart — reports results on Wednesday. Analysts will scrutinise the group’s truck activity closely, after significant losses at Swedish competitors Scania <SCVb.ST> and Volvo <VOLVb.ST> last week. [ID:nLN274307]

Oddo analysts said they expected a positive operating profit for the Mercedes part of the business in the second half, after a gradual recovery beginning in the second quarter.
The analysts had a more pessimistic outlook for Daimler’s truck business, where the fall in volumes accelerated in the second quarter.

When French carmaker PSA Peugeot Citroen <PEUP.PA> reports its results, also on Wednesday, attention will focus on strategy as new CEO Philippe Varin presents his plans. “The CEO’s strategic plan will take priority over the H1 numbers,” said Exane BNP Paribas analysts in a note. “Despite a significant improvement seen in Q2, thanks to the positive effect of the French and German scrappage measures, PSA is likely to report big losses in H1.”

Societe Generale analysts said they expected a group operating loss of 730 million euros at Peugeot Citroen, while Exane BNP Paribas estimated the loss at 760 million. Both warned that Varin could attempt some “kitchen-sinking” — booking significant charges in the first half to allow for a fresh start.

“However, his room for manoeuvre is not total as he must preserve cash and the equity,” Exane BNP Paribas analysts said. Fellow French manufacturer Renault and Germany’s Volkswagen <VOWG.DE> — both of which have benefited from scrapping schemes in their home markets — are set to report results on Thursday. [ID:nLO202303]

Oddo analysts said they expected Renault to post an operating loss of about 670 million euros, with further significant losses from Nissan and Volvo contributions. But cash generation may be cause for optimism.

“We’re expecting about a billion inflow — if you consider that they (Renault) were among the first to cut production and produced practically no cars in Q4,” said Nomura’s Tyndall. “Working capital is likely to be behind that improvement in free cash flow. The big question mark is as to whether or not that’s sustainable. I think we would argue that it’s not.” The group said it had achieved “significant” positive free cash flow when it reported first half unit sales earlier this month.