First observation: a possible infringement of Japanese tax laws by Mr. Ghosn doesn’t have anything to do with the results or the financial situation of Renault.
Second observation: in an industry that is as tough and competitive as the car business, there are only two survival strategies - position yourself in a luxury segment with high margins, or compensate smaller margins with large volumes and economies of scale; as such, it would be surprising for Nissan or Mitsubishi to jeopardize the alliance that links them to the French manufacturer since their survival seems indexed to the sustainability of the latter.Third remark: while Renault shares already were surprisingly affordable - like the shares of all car manufacturers, by the way, like BMW which we featured here last week - since the 19th of November the company’s shares are extraordinarily low priced.
And indeed, without falling into a sophisticated financial analysis or sum of the parts, we note that the market capitalization of the group (17 billion euros) represents a multiple of 3.3 times last year’s profits (5.1 billion) and a 50% discount on the company’s equity (34 billion) which is, however, profitable for the long cycle.
These kinds of valuation levels are usually reserved to companies which are in a near bankruptcy situation. Renault seems light years away from such a thing: the company is remarkably well-capitalized - Mr. Ghosn liked to unburden himself from the terror the last big crisis left him with - and since the company has been growing sustainably for ten years - at an annualized pace of 5% - the group has considerably improved its margin profile during that period and generates excess cash every financial year.
Nissan, owned by Renault for up to 43.7% of its capital, also displays a satisfying financial performance, with a 4% annualized turnover growth since 2008 and a record net margin for the last two financial years.
The profitability of the equity straightened out over that period approaches 10% - more or less the cost of capital among discerning investors. That being said, selling said equity for 50% of its accounting value - which without a doubt underestimates the value of the company’s stake in Nissan - appears overly conservative, or unreasonable when we talk about a profitable company that’s well managed, and that thanks to its Alliance disposes of a formidable competitive advantage - meaning its scale.
The car industry, as we regularly remind our readers, is as tough as it is ungrateful because it’s cyclical, extremely competitive and incurably capital-intensive. The quality of the profits in this industry is questionable and the opacity of the financial services divisions - although essential in the consolidated financial performance - is more or less absolute.
Moreover, Ghosn’s fall strikes hard: closely monitored by fussy boards in Japan and Europe, the compensation of executives - direct as well as indirect, benefits in kind included - normally is transparent and well documented.
That such a case comes to light looks just like a palace revolution, and creates the fear for potentially deeper than expected tensions between Renault and Nissan.
A reconciliation will require compromises: let’s hope that they will be found soon by the concerned parties.
In the case of Renault, all these real risks - which we certainly don’t deny - are more than integrated into the price. So, without looking to sketch an exact valuation, it seems that an investment at this price is limited to going against a maximum pessimism of the market.
The situation should thus spark the interest of contrarian investors, focused on the long-term and detached from the media fury.
(The author is a shareholder at an average price of 56 euros.)