Luca de Meo, CEO of Renault. (Photo credits: Renault – Olivier MARTIN-GAMBIER)
Renault is one of the leaders in the automotive industry in the world. It achieved a turnover of 46 billion euros in 2021. It is a French company actively engaged in global automotive markets. It owns brands such as Dacia, Renault, Lada, RCI Banque… Renault owns 43% of Nissan. Renault’s main shareholders are the French State with 15% and Nissan with 15%.
Technical feeling: favorable
Renault has had an annual stock market performance of 1.27% since 2008 against 6.52% for the Euro Stoxx 50. We note that the price is at its historic lows in 2008, 2020 and 2022.
We consider that from a technical point of view Renault’s price is testing a particularly important support, around 20/25€ with a strong discount compared to its intrinsic value.
Source: Bloomberg LLP and Evariste Quant Research. Bloomberg LLP is not responsible for this analysis.
In addition, the recent drop seems excessive to us compared to the Stellantis and Volkswagen comparables on a three-year rolling basis.
Source: Bloomberg LLP and Evariste Quant Research. Bloomberg is not responsible for this analysis.
Fundamental analysis: favorable
The recent negative performance of Renault on the stock market leads us to ask ourselves the question: is there a risk of bankruptcy for Renault? We did a quick analysis of Renault with this question in mind.
Renault has 22 billion euros in cash. The S&P rating is BBB-, investment grade, stable outlook. Renault’s debt ratio is 140%, which is quite high. Renault’s net debt is 39 billion euros. When the leasing-purchase liabilities are not included in the debt because they are secured by receivables, the net debt falls to -5 billion EUR.
The Free Cash Flow for 2021 was positive, for 2022 Renault management expects a slightly positive Free Cash Flow.
The sale of the Russian business could bring in some cash. Renault could also sell Nissan shares if necessary. Renault owns 43% of Nissan. (Nissan’s capitalization is 15 billion euros and its book value is 32 billion euros.)
Moreover, in a similar situation a few years ago with Peugeot, the French state helped to restructure Peugeot. It is highly likely that the State will take similar measures for Renault if necessary, especially since the State has realized a significant capital gain with Peugeot.
This indicates a very low risk of bankruptcy for Renault, even in unfavorable market conditions in the automotive industry for the next few years.
We are now going to quickly estimate the intrinsic value of Renault first from a balance sheet point of view then from a Cash-Flow point of view.
The net book value is EUR 28 billion. The value of tangible net assets is around EUR 21 billion against a market capitalization of only EUR 7.6 billion, ie around a 64% discount!
At this low asset valuation from our point of view, some competitors could be interested in acquiring RNO on advantageous terms by gaining access to Renault’s brands, distribution, production and financing infrastructure and R&D capabilities.
Renault’s free cash flow on average over the last 15 years was EUR +1.4 billion according to Renault’s annual accounts. At the current capitalization of 7.6 billion euros, the CAP/FCF or P/FCF ratio per share is = 5.4 which is very low.
The discounted future cash flows together with the net book value indicate a higher intrinsic value than the current stock price would imply. This price therefore seems too low to us.
AI GARP Sentiment: Favorable
Many stocks can remain undervalued for a long time compared to their intrinsic value (the famous “value trap”). Artificial intelligence makes it possible to pre-select, through top-down scoring, a portfolio of particularly interesting stocks to study in a given market context.
Thus, our “artificial intelligence sentiment” indicator for Renault is currently high. This indicator indicates that not only is the Renault share attractive in terms of valuation, but also that it deserves to be on the “radar screen” of stocks to watch.
Source: Evariste Quant Research
We are therefore buying Renault compared to the EuroStoxx 50 index. We can thus buy Renault shares by hedging its market risk by buying a Euro Stoxx 50 bear ETF (such as the Lyxor BSX bear EuroStoxx 50 ETF) to neutralize market risk.
Methodology of this action research
We value a stock according to three dimensions via a “top down” filtering process backed by a “bottom up” fundamental analysis. These dimensions are
1. Definition of a GARP (Growth at Real Price) Investment Universe
2. Monthly “top down” artificial intelligence scoring
3. Fundamental “bottom up” validation.
1. Our GARP universe is based on the identification of an investment universe of long-term growth stocks via quantitative filters selecting stocks within the investable universe (French stocks subject to liquidity constraints).
2. Artificial intelligence scoring identifies, on a monthly basis, within this universe of 100 multi-cap stocks, around 30 long-term growth stocks which are the most attractive in terms of valuation. The goal is to identify value-priced growth stocks, ie stocks whose price is attractive relative to their long-term value.
3. Finally, the final fundamental analysis makes it possible to validate the whole of the above process by focusing the human research effort and not the machine on stocks already pre-selected via a stack of filters.
Evariste Quant Research is an independent financial analysis and research firm based on Artificial Intelligence solutions applied to asset management. Christian Lingemann is Associate Professor in Finance and Strategy at the Clermont Ferrand Business School.
This financial analysis is not investment advice. Evariste Quant Research/Christian Lingemann and their clients may hold securities mentioned in this analysis.