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Dear readers,
Porsche (OTCPK:POAHY) (OTCPK:POAHF) is not an investment I’ve covered for some time – since late 2022 to be exact, and the company hasn’t exactly been a rosy play since that time. My main investment in the German automotive sector is my investment in Volkswagen (OTCPK:VWAGY) (OTCPK:VLKAF) (OTCPK:VWAPY). Now, investing in either VW or Porsche can be thought of as related, because of these companies’ fairly advanced interconnectivity. I’ve covered these relationships extensively in my previous articles, the most recent for POAHY, can be found here.
I maintain my stance that Porsche is probably one of the more attractive car brands to invest in on the stock market. Because of the valuation decline, we’ve been seeing for the company, I also maintain that the valuation is, in fact, a good one.
In this article, I will clarify to you as to why I believe this company represents at this valuation and even in this interest rate environment, a good company to invest in – provided you have the right sort of outlook. By right, I mean realistic.
Because we all know that car companies are volatile, and the automotive sector with what’s currently going on in terms of ESG and EV does not make it a particularly pleasant place to invest in when looking at overall stability.
Let’s look at what we have going for us with Porsche going into 2024.
Porsche – A 2024E play with upside, especially since the decline
Porsche reported fairly negative results for 2023 and year-end. The company’s earnings came in below consensus estimates (Source: S&P Global), by over 10%. The company also experienced a revenue decline of nearly 5%, with a volume decline in the double digits on a YoY basis. (Source: Porsche IR)
However, the quality of those earnings improved. Operating profit was up, and operating margin expanded by over 100 bps to 17.1%. In the automotive sector, Porsche remains a margin leader with the exception of some EV brands (and those, I would argue are still in the process of seeing declining margins). The company saw a very good sales mix, and these improvements were done despite combined headwinds of supply chain issues and higher R&D and SG&A expenses. Company FCF margins improved as well, and the launch of the new iteration of the Cayenne was a particular success for the company here.
The company also provided investors and analysts with improved guidance – a revenue increase of €40B on the low side, up to €40.2B on the high side for the full year, and improvement in those operating margins up to a high-end guidance target of 20%. (Source: Porsche IR)
Porsche’s current strategy includes further investing and pushing into the area of BEV. 2024E also is the year where the company expects to launch a total of four new models, part of which represents these BEV investments.
Some reminders here. Porsche is a company that over time has generated a clear alpha over the industry. Its product and business models have allowed it to grow faster than global, with 2004 to 2022 seeing vehicle (light) sales at 1.7% growth per year, but Porsche has grown revenues and unit volumes at an average of over 10% and 8% respectively, making for a very clear outperformance here. (Source: Porsche)
But the company’s investments in new models and BEV technology certainly do come at a price. With R&D up, and SG&A up, the company’s bottom line results are being impacted. That being said, the company’s annual returns on invested capital are over 6% above its cost of capital – and this is since 2005. Again, I want to emphasize that this company is a solid outperformed according to most perspectives. Porsche has never gone below 11.5% EBIT margin, which for an automotive business is worth not only highlighting but really focusing on. (Source: Porsche IR)
Profit projections and forecasts make sense, as luxury products like Porsche do keep their appeal even during downturns. I have long made a case for investments in Louis Vuitton (OTCPK:LVMUY) and its ability to outperform even during periods like the GFC. These companies in the high ends with massive margins simply have the support to get through these periods without serious issues – at least this is how I view it and how I “work” with these investments.
I view Porsche’s upside as synonymous with being able to charge a significant price point for a luxury car – and Porsche has plenty of IP and intangible assets and brand strength to back up these pricing trends and price points. Similar to Ferrari (RACE), this is one of the very few automotive brands that I would consider having any sort of moat. Maybe Mercedes and BMW as well, but nowhere near as good as Porsche and Ferrari – moats should have a high requirement.
The upside in this company is likely, as I see it, for another 10 years or more. The company isn’t as exclusive as Ferrari, but it’s certainly more exclusive than BMW (OTCPK:BMWYY), for instance. However, I would view the Porsche focus on detail in its models as superior to Ferrari, and the technology in most Porsche cars, especially the older air-cooled models as being superior to almost anything. This is confirmed by the fact that the company keeps winning industry accolades, including 718 models over the past 42 years appearing 24 times on the “10 best cars list”, which is second to almost none. (Source: Porsche IR)
My earlier view was that the upside for Porsche is very significant. This is a stance I continue to hold at this time, and why from a valuation perspective for the ticker I invest in, I view eventual impacts from these recent results as minor. We also now have several different ways that we can go about investing in Porsche as a business.
Let’s look at what sort of risk and upside we have to this company at this particular valuation.
Upside and Risk to Porsche
Porsche, like any investment, has a number of risks to consider prior to investing. The obvious risks are related to the cyclical and capital-intensive environment where the company operates. Any production of inventory overcapacity or excess here is negative for the business, turning profits down.
The second risk has to be the significant ownership stake, that I have spoken about before, of the Porsche/Piesch family. Without exaggerating, this is essentially a family investment vehicle. These facilities can easily block major decisions for the company, which means that even if the company has capable management, they’re not really in charge – the family representatives are. This also brings us to the third risk, which is European/German in nature, but also related to the family in part-union relationships. Porsche’s workforce is very heavily unionized – not only do they have heavy representation, but the union has board representation, which tends to limit profit because of lock-step wage demands during times that are good and claims to benefits during worse times, combined with work rules and pushing that limit company flexibility.
This is not in any way unique to Porsche, but it bears mentioning here.
Upsides are plenty as well. Between Porsche’s brand image, its presence in a global market which reduces its demand on any one regional economy and improves overall growth prospects, along with the fact that the products command incredible ownership loyalty due to their build quality means that Porsche owners are likely to remain Porsche owners. It’s a very attractive product to own.
Bringing us in turn, to valuation.
Porsche Valuation
The company’s ADRs here to look at are POAHY and POAHF. Natively, you can choose to invest in ticker P911, which is the Dr. Ing. h.c. F. Porsche AG currently trading at a share price of sub-€90/share. However, my argument is not small due to the yield is to invest in native ticker PAH3, which comes at a better dividend yield. The current yield for that, when you consider a share price of €47.3, is over 5.4%, which is a very solid sort of yield for investing in Porsche. Especially when you consider that the company, and this ticker, is down 40%+ in the past 3 years (though this is from what I consider to be an overvaluation).
However, the company is no longer overvalued here.
Still, based on what I said earlier in the article, I believe investing in the company’s Pref PAH3 share, should be viewed as a high-interest savings account with the potential for capital appreciation. This is not necessarily a bad thing, and Porsche is a great company to invest capital in – but I wouldn’t expect a massive triple-digit sort of outperformance.
Analysts would tend to agree here. Valuation targets for PAH3 based on 12 analysts come from a low of €47 to a high of €104, with an average of around €63, marking an upside of around 35% – a worthy investment by any metric, and 7 out of 12 analysts consider the company to be a “BUY” here. (Source: S&P Global)
While risks do exist for Porsche, I view the near-term risks to this company as fairly limited due to the combination of brand strength and stability in production, margin, and sales. Diversification of these sales on a global scale is also a major advantage here.
Since my last article, the dividend has also received a major bump thanks to the decline in share price, and at over 5.4% is well over the interest-free rate here. If given a choice to invest my money in a savings account, or “go for” Porsche here, I would easily choose an investment in this stock – I believe the stock will outperform. As long as the Porsche/Piech families do their own best to protect their investments, it is very likely that they, free-float shareholders like us, will continue to be well off.
In my earlier articles, I’ve looked at both NAV and DCF approaches – and that assumption and target still hold here, pointing to Porsche managing at least a €85-€95 sort of share price.
This brings me to the following thesis for Porsche for 2024E.
Thesis
- Porsche is, to me, a more interesting investment than VW due to its corporate structure and holdings. With the recent information on the IPO and the dividend bump as well as improved results, the company’s portfolio is ready for improvement and higher returns. However, the company is also “less” interesting than VW, because of a currently inferior yield, by which I mean a quite inferior yield indeed, Porsche only manages just above 1% in yield for the preferred share, which is significantly below that of VW.
- These changes justify a change in the price target, and I now consider Porsche to be a “BUY” with an upside to a PT of €75/share.
- I am still LONG Porsche and will watch results and valuation with interest here, and I may expand my position at a continued undervaluation.
Remember, I’m all about:
- Buying undervalued – even if that undervaluation is slight and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn’t go into overvaluation but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.
Porsche now fulfills all of my investment criteria – it’s a “BUY” here.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
