STLA - Porsche: Spirals Down But I Am Buying

2023-12-15 07:54:49 ET

Summary

• Porsche's stock has decoupled from Ferrari, with Porsche spiraling down while Ferrari races upwards.
• Porsche's profitability distinguishes it from other automakers, with strong financial performance and impressive margins.
• Porsche's main market is China, but it has been facing challenges due to shifting consumer preferences and increased competition from electric vehicles.

Introduction

Buckle up. Porsche (DRPRF)(DRPRY) is on the menu today.

Some SA readers may know by now how I am long Ferrari (RACE) and admire its profit mastery .

Since its IPO in September 2022, Porsche has caught my attention and I have followed it to see if it was worthy of being part of my portfolio together with Ferrari.

Let me give the answer right away: I do own some shares of Porsche. However, this year, the two luxury car manufacturers have decoupled significantly, with Ferrari racing upwards, while Porsche spiraling down.

Now, let's make it clear from the beginning. I don't think Ferrari and Porsche are true competitors since Ferrari positions itself on the very top of the luxury vehicles pyramid. Its cars are sold at an average price above €450k, while Porsche sells its cars at an average price of €120k. Ferrari delivers around 14,000 vehicles per year; Porsche delivers 300k+ cars.

However, Porsche is a company whose profitability clearly distinguishes it from the rest of the automotive industry. Since my main goal is to own extremely profitable companies whose brands are iconic and craved, I wanted to screen Porsche's stock to see what value it offers.

The company

Porsche AG's IPO centered on one number: 911. The subscribed capital was €911 million, made up of 50% ordinary shares and 50% non-voting preferred shares. The number of shares outstanding is 911 million, with 455.5 million ordinary shares and 455.5 non-voting preferred shares. The shareholder composition is rather clear: Volkswagen AG ( VWAGY ) indirectly holds, via Porsche Holding Stuttgart GmbH, 75.0% of the ordinary shares minus one ordinary share. Porsche Automobil Holding SE directly holds 25.0% of the ordinary shares plus one ordinary share. Therefore, it owns around 12.5% of the company's total share capital.

The company

"In the beginning, I looked around but could not find the car I'd dreamt of. So, I decided to build it myself". These famous words from Ferry Porsche are found in Porsche's 2022 Annual Report.

The company manufactures luxury sports cars and engines, providing spare parts and other services for its customers.

The company uses as its main performance indicators: sales revenue, return on sales, automotive cash flow margin, EBITDA margin, and automotive BEV share as a percentage of total sales. These indicators are more or less standard for automakers. If we take a snapshot of Porsche's operations and its numbers, we see how the company has been able to grow from 2021 to 2022. Last year's sales reached a record high of €37.63 billion, 13.6% more than sales in 2021. Considering Porsche sold 313,721 vehicles in 2022, the rough average selling price is around €120k. This year, Porsche is expected to break the €40 billion barrier.

Gross profit was €10.55 billion, which translates into a 28% gross margin while operating profit came in at €6.77 billion, which is an 18% return on sales. The Automotive EBITDA margin was 25.2%.

Porsche's automotive net cash flow increased to €3,866 million in 2022, with its net cash flow margin standing at 11.2%.

Those who are unfamiliar with the industry would probably like to know where Porsche positions itself in terms of margins. I have shown elsewhere how the largest car manufacturers have operating margins usually in the single digits, apart from Stellantis ( STLA ), which positions itself at the same profitability level as Mercedes ( MBGAF ).

On the other side, we have Ferrari with an EBITDA margin almost at 40% and EBIT margin of around 27%.

Let's talk about the product mix. The Cayenne, Porsche's SUV, is the best-selling model with 96,800 vehicles sold, followed by the Macan, with 89,767 vehicles.

Geographically speaking, in 2022 the main market was China, with 96,360 vehicles sold. Keep this well in mind, as it is something highly related to this year's sharp decline of the stock.

Here below, the last annual report shows Porsche's deliveries by region and by models.

After China, North America is the second-largest market. In reality, it would be Europe. But Porsche separates Germany (9.5% of deliveries) from the rest of Europe (20.2%). We have already talked about the two bestsellers: Cayenne and Macan. In third place, we find the iconic 911, followed by the Taycan and the Panamera.

Q3 2023 Results

Now, moving on to the latest quarterly report available, let's go directly to the big issue: China. As we can see, YTD, China accounts for only 25% of total sales, down 5 full percentage points from its usual share. This is the result of China sales falling 12% YoY, reaching 60,748 vehicles, due to challenging economic conditions in that region. In the same period, new car sales in China grew 7%, showing even more how Porsche performed really poorly compared to the market. Because of this setback, Porsche announced it "proactively reduced production to balance demand and supply". Now, this is something we would never hear from Ferrari, which always manufactures one car less than the market demand. This detail is important to understand why the two companies belong to different luxury segments and operate in different ways.

As a matter of fact, it seems Chinese consumer preferences are shifting more and more from models like the Macan and the Cayenne to others like the BMW X5. Moreover, Chinese consumers are opting more and more for electric vehicles, which creates a new way of perceiving what luxury cars are. In a certain way, Porsche's models have aged and this is why the company's CEO led an investors workshop in Shanghai whose aim was to reassure Porsche's Chinese investors.

The presentation was rather long and focused on Porsche's new models, especially the electric ones. Indeed, it does sound a bit worried about a market that has quickly started to turn its back on Porsche. The new hybrid Panamera, and the electric Macan and 718 were announced, No one knows the future, but for sure we will need to monitor closely Porsche's performance in China. In case it keeps on deteriorating, then the bull-case for the German automaker may change.

Aside from China, Porsche is performing quite well, with sales revenue up 12.6% YTD, with the negative note operating profit grew at a slower pace - only 9% - compared to the top line. This was due to intensified investment to speed up the electrification and the digitalization process.

Looking more in-depth at Porsche's YTD deliveries, we see North America becoming larger. Model distribution isn't surprising, with the Macan and the Cayenne being the top two choices.

Zooming out and looking ahead, Porsche reported that its order bank is covering production well into 2024.

This is why Porsche didn't change its outlook and still guided for sales revenue above €40 billion, with an EBITDA margin between 25% and 27% and an operating margin between 17% and 19%.

Valuation and conclusion

Surely Porsche can't be valued with single-digit multiples like the ones given to most automakers, Mercedes included. On the other side, it can't even trade at 40x earnings like Ferrari, which is priced to perfection thanks to its high predictability and excellent execution.

But considering Porsche is a company whose EBITDA margin is above 25% and whose operating profit should soon be above 20%, we need to be honest and admit we are before a potential cash cow, whose main risk is that it has been publicly traded as a standalone company only for a year, and we thus don't have enough data about its past operations.

Considering the company may hit €40 billion in revenue, with a return on sales of 18% and a net income margin of 13.5% we could expect Porsche to report net income of €5.4 billion. Divided by the 911 million shares outstanding, we have 2023 EPS of around €5.93. This is a 14 PE, not extremely low, but not even expensive. As a matter of fact, it is cheaper than the current market average.

I consider Porsche a company whose earnings multiple could be 18 without causing a headache to investors. Therefore, I have a fair value of around €107.

Considering the company is able to generate almost €4 billion in automotive net cash flow, we have a company that over the next ten years could generate around €50 billion in net cash flow. Its current market cap is €74 billion, which means the sum of its future cash flows amounts to around 67% of the price we pay today for the company. This is not a bad proportion, but actually makes the deal quite alluring.

In conclusion, while Porsche may not position itself on the very top of the luxury vehicle pyramid-like Ferrari, it is a highly profitable company whose iconic brand is craved by consumers. With its impressive margins and strong financial performance, Porsche is a valuable addition to any investment portfolio.

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