RACE - Porsche AG: Record Deliveries Again In Q1 After A Strong Fiscal 2022

2023-04-21 18:03:34 ET

Summary

• Porsche AG has increased deliveries in Q1 2023 by 18% YoY, after the already record year 2022.
• While shares are not cheap, it looks like Porsche can keep growing both sales and profit.
• The stock is a Buy for long-term investors, especially in any market weakness.
• The intense lobbying for e-fuels shows a risk the EV transformation poses for the sports car manufacturer.

(Note: all amounts in the article are in EUR. At the current exchange rate 1 EUR is 1.1 USD)

Investment thesis

Porsche AG (Porsche AG) (DRPRY) (DRPRF) reported record results for the fiscal year 2022 and a strong guidance for 2023 .

The car manufacturer announced Q1 deliveries on April 17, which were above expectations. Porsche delivered 80,767 cars in Q1 2023, a record number and an increase of 18.6% YoY (Q1 2022 deliveries: 68,426). Based on the delivery numbers, I expect that Porsche will achieve sales and profit at least at the upper end of its 2023 guidance, and probably above that.

With a TTM P/E ratio of 21, Porsche AG is not cheap. Porsche AG shares have increased 39% over the 6 months since the IPO last September. But it looks like the company is in a sweet spot - not a niche car maker, but also not delivering 1mn+ cars annually - so that it can both increase prices and sales as its iconic cars experience strong demand in markets globally.

Therefore, I think shares are a Buy for long-term investors, especially during any market weakness. Per its dividend policy , Porsche AG intends to pay-out approximately 50% of the group's profit after tax. This should lead to a dividend yield between 2.5 and 3%, a nice add-on for income-oriented investors.

(Note -like it is common practice for German/European companies Porsche AG pays only one annual dividend. The dividend for the fiscal year 2022 will be paid from capital reserves and 1 euro per share only. All actual 2022 earnings will still go to Volkswagen. So, you should expect a regular dividend from next year onwards).

Record results in 2022, guidance for 2023

Porsche achieved record results in 2022 and confirmed all medium and long-term targets. Revenue increased by 13.6% to 37.6bn and operating profit by 27.4% to 6.8bn, resulting in a profit margin of 18% (up 200bps YoY).

Car deliveries though increased only by 2.6% to 316,000 units. Improved pricing and a better product mix (and to a lesser extent also currency effects) drove the increase in revenue and profit to significantly outpace unit delivery growth. We have seen this from other auto manufacturers in 2022, and the results of the Porsche parent company Volkswagen Group ( VWAGY , VWAPY , VLKAF , VLKPF ) were similar. Where Porsche stands out is that it managed to grow not only revenue and profit, but also unit sales.

Increased sales and profit guidance for 2023

Based on a strong order book and model line-up, the company guided for further increases in 2023.

We should expect sales between 40 and 42bn and operating profit between 6.8 to 8bn. While the operating margin in 2022 was 18%, the guidance for 2023 is between 17 and 19%. I am quite positive and assume that the company will come out at the upper end, as the mid-term target for the operating margin is 20+%. The strong deliveries in Q1 have validated that assumption.

Record Q1 deliveries

2023 is a special year for Porsche. The company will be 75 years old as it produced its first car, the Porsche 356 No 1 Roadster , in 1948. The story is that Ferry Porsche did not like any existing sports car on the market and, in line with the Volkswagen family business, decided to build a new one.

Porsche started its anniversary year strong and delivered 80,767 cars in Q1 2023, a record number and an increase of 18.6% YoY. It is especially impressive that the company increased deliveries in all its 5 global delivery regions (Germany, Europe w/o Germany, North America, China, Overseas and Emerging Markets).

While we usually read that China is the largest market for the car manufacturer, this is only true because of a reporting anomaly. The company splits Europe into their home-market Germany and Europe excluding Germany. Put together, the European market is significantly larger for Porsche than China.

The only downside in the delivery numbers is that Porsche sold fewer electric vehicles than a year before. In 2022 the BEV share had dropped to 11.3% from 13.3% in 2021. In Q1 2023 it dropped again. The company has just one BEV model at the moment, the Taycan, and only 9,152 cars were delivered in Q1 (-3% YoY). An electric version of the Macan is planned for 2024.

Strong model line-up

Nevertheless the model line-up is strong.

The two best-selling models in Q1 were again the SUVs, Cayenne and Macan. The following graph from the pre-IPO company presentation shows how important those models are for overall sales. The bulk of the delivery growth over the last decade has been through the SUVs.

So, it is good to see that the company has new models for both its SUVs in the pipeline. A new and improved Cayenne has just been announced . The New Porsche Driver Experience, a revamped interior architecture and digital setup, makes its debut with this model. The new Cayenne can be bought in two different combustion engine versions, but also as an electric hybrid version. There is no fully electric version though. This should come in 2025.

The next fully electric Porsche model will be an electric Macan which Porsche plans to deliver to customers in 2024. In 2025 Porsche wants 50% of its new deliveries to be electric , so this will be necessary to execute the electric transformation strategy.

(A side note on a competitor - looking how strongly SUVs have driven Porsche sales to grow 3x over the last decade certainly helps to understand why Ferrari (NYSE: RACE ) wants to get its share of SUV sales now too. Ferrari used to say that they would never produce an SUV as this would bastardize the brand and the car would not be a real Ferrari. As Bob Dylan says: The Times They Are A-Changin'.)

Quarrel on e-fuels

The European Union has become embroiled in a last-minute wrangling over the planned ban of combustion engines for new vehicles from 2035 onwards. A final vote on the regulation was expected in early March but was stopped by Germany, annoying the rest of the EU (except maybe Italy who have Ferrari to protect). The argument is that e-fuels should be an alternative to electrification in some segments.

Porsche AG and Volkswagen AG are developing e-fuels, and it is certainly helpful to assure all those owners of expensive 911 cars that the car has a future.

Porsche claims that 70% of all the vehicles it has ever built are still on the road. Desirability and longevity are obviously a key part of the value proposition. The EV transformation poses a risk here that Porsche needs to manage. So far the company is doing an excellent job - in my view.

Alternative ways to buy Porsche AG shares

Porsche AG is still part of the Volkswagen Group and Volkswagen owns three-fourths of the company. The Volkswagen share price has not benefited so far from the Porsche IPO and the share price increase since the IPO. The 75% stake in Porsche AG is worth around the same as the whole market cap of Volkswagen.

The same argument can be made regarding Porsche Automobil Holding SE (Porsche Holding) ( POAHF ) ( POAHY ) which owns 12.5% of Porsche AG. I have written about this in previous articles . But as one reader has observed in a comment: those are mathematical facts regarding net asset values, the market reality is currently different. I still think those companies are a good alternative way to buy Porsche AG shares, but you need to make your own judgement here.

Conclusion

Porsche AG has managed to continuously increase revenue and profit over the last decade. The company is well positioned to keep doing this. Q1 2023 deliveries are certainly encouraging.

The dividend of around 2.5-3% is not overly generous, but it adds to the total return. And it seems relatively safe given the ownership situation. Porsche Holding relies on the dividend to pay down the debt it has incurred with the acquisition of its direct stake in Porsche AG.

In the coming quarters, Porsche AG should benefit from its well-filled order book and be less dependent on general economic developments than other car manufacturers, which limits the downside risk. The company has a strong model line-up. If there is a setback in the share price, investors should see this as a buying opportunity.

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