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About the company
Groupe Renault is a French multinational automobile manufacturer established in 1899. The company produces a range of cars and vans, and in the past has manufactured trucks, tractors, tanks, buses/coaches and autorail vehicles.
Investment Thesis
Renault shares fell 9% on the 15th of March on report by the French Media the Renault misled customers on emissions approval tests. Renault continues to deny that it has breached any regulations and says that its cars are not equipped with cheating software.
Today, Renault is trading on a P/E of 6x which is very cheap compared to other companies such as BMW and Daimler which are trading on a P/E of 8x and 8.84x respectively.
This means that your concern of the E4bln hit on the P&L if they are found guilty is mostly priced in.
A back of the envelope calculation shows that if this concern is removed and the company trades on a P/E similar to that of its peers, the price target multiplied by 2016 earnings would be €100 (8 x 12.46 = €99.68). On 2017 forecasted earnings (€13.78), the price target would increase to €110.
Rationale for our Overweight Recommendation
We are overweight on Renault with a price target of €100 per share for the following reasons:
Outlook
Renault should be a satellite in a portfolio. Margins, cashflow and profitability are expected to continue increasing in the coming years. Renault should be added to a well-diversified portfolio.
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