Europe automakers seen changing gears

By Marcel Michelson - Analysis

PARIS (Reuters) - European automakers have put on a brave face and fared better than their U.S. counterparts but a reality check looms as surging fuel and raw material prices put earning forecasts at risk.

Analysts say France's PSA Peugeot Citroen (PEUP.PA: Quote, Profile, Research, Stock Buzz) and Renault (RENA.PA: Quote, Profile, Research, Stock Buzz) could miss their operating margin targets, forcing them to either trim targets or boost cost cutting, possibly as part of mid-year results due this month.

"It's unrealistic to assume that Renault will achieve its original guidance," said Pierre-Yves Quemener, head auto analyst at Landesbanki Kepler.

"The chances of "commitments miss" are growing week after week as cost inflation bites each time deeper and as the macro environment is depressing volumes."

PSA and Renault, Europe's No 2 and No 6 makers, have declined to comment ahead of their mid-year results.

Sergio Marchionne, CEO of Italy's Fiat (FIA.MI: Quote, Profile, Research, Stock Buzz), which ranks fifth, has stood by his group targets.

"Despite what is happening, we are not only keeping our 2008 profit and cash flow forecasts, but we confirm those for 2009," Marchionne told a conference this week.

But in a year when the price of oil is up 45 percent, some steel prices are up 50 percent and other raw materials such as aluminum have also surged, assumptions and forecasts are proving hard to hold on to.

"We're looking at it day by day and while we remain optimistic and keep doing our best, it is clear that the market environment has changed to the worse and many warning lights have gone to orange from green," one car industry source said.

J.D. Power Automotive Forecasting on Friday cut its 2008 forecast for western Europe auto sales to a drop of 4 percent.

"Costs are rising and demand is dropping fast, it's getting very difficult indeed for carmakers," said J.D. Power analyst Jonathon Poskitt.

LEADER VW TAKES ACTION

Volkswagen (VOWG.DE: Quote, Profile, Research, Stock Buzz), Europe's biggest carmaker by sales volume, has already acted, announcing last month that it would boost its cost cutting plans to offset higher raw materials.

The automaker has an average 2008 price earnings multiple of 14.7, twice the average for European automakers of 7.3, according to Reuters data. PSA trails the pack at 5.4 times.

Volkswagen has relatively modest goals for 2008, aiming to improve on both sales and operating profit over last year.  Continued...