By Laurence Frost
PARIS (Reuters) - French carmaker Renault (PA:RENA) reported on Thursday that first-half profit surged on rebounding European demand - but not enough to meet soaring investor expectations from the recovery, or concerns about weaker pricing.
Despite hitting its highest operating margin in a decade, at 4.8 percent, Renault's shares fell as much as 7.5 percent as investors drew unfavourable comparisons with rival PSA Peugeot Citroen's (PA:PEUP) dramatic turnaround in the same period.
"Clearly Renault has not beaten as handsomely as Peugeot did yesterday," Morgan Stanley (NYSE:MS) analyst Harald Hendrikse said.
Renault "is not showing the same operational improvements", Hendrikse said in a note, adding that he saw "no evidence of any price improvement in Europe".
Under Chief Executive Carlos Ghosn, Renault is stepping up productivity and technology sharing with 43.4 percent-owned Nissan (T:7201), Daimler (DE:DAIGn) and other partners in pursuit of a 5 percent operating margin.
Renault has pushed the goal back by one year to 2017, reflecting a slower-than-expected rollout of new models, although Chief Financial Officer Dominique Thormann said on Thursday the target would be met "probably sooner than planned".
But Peugeot CEO Carlos Tavares, Ghosn's former second-in-command at Renault, on Wednesday surprised the market with a 5 percent operating margin as the carmaker bounced back from near-bankruptcy just a year ago.
At 0815 GMT, Renault shares were trading at 83.70 euros, down 7.3 percent - by far the sector's sharpest decline (SXAP).
"Even strong beats have underwhelmed in autos this reporting season," said a Paris-based trader, citing similarly weak reactions to Ford (N:F), Faurecia (PA:EPED) and Daimler numbers.
DISCOUNTS & SPECIAL OFFERS
The selloff came despite Renault's surging operating profit, up by almost a half at group level and 89 percent at the core auto division. Bottom-line net income rose almost in step to 1.4 billion euros (983 million pounds).
Growing business with Renault's two main affiliates accounted for about half of the 12 percent group revenue gain - to 22.2 billion euros - as the French carmaker began building Rogue SUVs for Nissan and Smart minis for Daimler.
But behind the top-line growth, propelled by the market recovery and overseas earnings translated into a weaker euro, weaker pricing wiped 283 million euros off earnings.
Renault blamed the slide on discounts and special offers to shift older models, such as the Megane compact, Scenic minivan and even the three-year-old Clio mini - as well as mounting costs arising from tighter Euro 6 engine emissions standards.
"The run-out of some of their core products is well known, but its costing them more than expected," Exane BNP Paribas (PARIS:BNPP) analyst Dominic O'Brien told Reuters.
Despite its strong profits, Renault made no changes to full-year goals consisting of unspecified "increases" to registrations, revenue and margins.
Sales growth made a bigger first-half earnings contribution than cost-cutting, it said, and the gap is likely to widen.
"Once you reach a level of cost-competitiveness, it's your products and your sales that drive profitability," CFO Thormann said - in a message interpreted by some as a lowering of productivity ambition.
Arndt Ellinghorst, a London-based analyst with Evercore ISI, cited "somewhat lower-than-expected savings" as a source of disappointment.
"Renault was nowhere near the beat and 5 percent margin PSA impressed with yesterday", he said.
