2023-08-31 03:11:15 ET
Summary
- Multiple comparisons don't work, as Porsche cars sit somewhere between the "luxury" and "premium".
- Strong latest results confirm that at least the lower bound yearly targets will be reached.
- Good results and future guidance create value for common shares but lack a boost for preferred.
Porsche ( DRPRF , POAHY , POAHF ) is not only a car manufacturer, but also a cult. It's hard to imagine any other carmaker with such a loyal customer base and brand enthusiast clubs worldwide. Their 911 model is quintessential of racing heritage, quality, and technology in a historically recognized body shell. It is not only a luxury everyday car, but a good investment with appreciating prices as soon as they receive the "Porsche Classic" badge or immediately after you become an owner of some "limited edition" one. But this is the story for another analysis, here we will discuss DRPRF and P911 stocks, representing the company itself. Although P911 saw its share price decrease with the sales increase, it is reasonably priced now. Despite its upbeat prospects, they are all priced in. Comparing it with competitors and analyzing the latest quarterly results, I will support my point of view and I will come up with my price target.
Company Overview And Operating Segments
Needless to say, Porsche is one of the world's most successful luxury car manufacturers. The company (based on their presentation) is operating in segments of: sports cars, sport limousines, and Sport Utility Vehicles. Its shares have a "Hold" SA Analyst Rating and no Quant rating .
As my SA colleagues already mentioned, it can be quite tricky to buy Porsche stock on the US market. As P911 is based in the Frankfurt Stock Exchange, there are several options for US investors to either buy directly euro-denominated (if your brokerage service offers access) or buy POAHY shares locally, which is the special investment vehicle holding a share in Porsche and VW. Direct ADR for P911 stocks is DRPRF, which is traded in US dollars and represents preferred shares of Porsche AG.
Porsche's IPO that took place last year became one of the biggest listings in Germany since 1996 and was priced at the top of the indicated range at 82.50 euros. Despite the general market turmoil, the stock resulted in a solid Total Return of 26.74% to its investors.
Peer Analysis And Sector Performance
Porsche itself puts the company in "luxury" (Aston Martin (AMGDF), Bentley, Ferrari (RACE), Lamborghini, Maserati, and McLaren) and "premium" (Audi, BMW (BMWYY), Mercedes-Benz (MBGAF)) niches, making it difficult for comparative analysis.
Mercedes-Benz | BMW | Ferrari | Aston Martin | Average | Porsche AG | |
P/S Forward | 2.94 | |||||
EV/EBITDA Forward | 6.13 | 5.74 | 24.45 | 12.18 | 12.12 | 9.09 |
EV/Sales Forward | 1.07 | 0.98 | 9.44 | 2.22 | 3.42 | 2.45 |
Gross Margin ((TTM)) | 22.12% | 17.39% | 48.93% | 32.88% | 28.73% | |
EBIT Margin ((TTM)) | 12.41% | 11.17% | 25.61% | -8.83% | 18.96% |
If you check the table above, it can be confirmed Porsche is not as marginal as Ferrari, but more than BMW or Mercedes. The rival with the closest multiples is Aston Martin.
This makes it difficult to compare with competitors as it seems overvalued compared with Mercedes and BMW but undervalued compared to Ferrari multiples. The performance of the mentioned competitors can be seen in the graph below, with DRPRF underperforming.
Multiples analysis doesn't give us a representative picture, leaving me to continue with alternative valuation techniques. The second reason, why it is not useful to stick with multiple comparisons - is the fact that Porsche shares are preferred, while RACE, for example, is not.
Latest Quarterly Results
The company continued its way, reaching the yearly target on Return On Sales ((ROS)). The actual number is a bit lower if we exclude interest income, but continues to uptrend and is in line with the 19% target .
H1 2023 | 2022 | 2021 | 2020 | |
ROS before non-operating profit | 18.9% | 18.0% | 16.0% | 14.6% |
H1 2023 | 2022 | 2021 | 2020 | |
Core Profit Margin from sales after tax | 13.1% | 12.6% | 11.1% | 10.5% |
Asset Turnover ((ATO)) | 1.877 | 1.877 | 1.711 | 1.907 |
Asset Turnover stayed the same, while the core profit margin continued to increase, resulting in higher return on net operating assets. With Sales already surpassing 20bn EUR, there is no doubt that the company will reach its lower-bound target.
Risks
This brings us to the risk section regarding future Outlook. Existing challenging situations in supply chains will continue to affect the results. Moreover, increasing costs will prevail, affecting the manufacturing.
With the continuing Russia-Ukraine conflict, gas supply shortages may arise once more, affecting the performance. Also, sanctions restrict economic transactions with Russia, potentially leading to impairment risks for existing leased assets and financial receivables.
Despite the challenging macroeconomic environment and geopolitical tensions, the company doesn't expect the supply situation to become significantly worse, posing risks to its confirmed Outlook.
Valuation Methodology
My calculations are based on the last 3 years of Porsche AG's financial statements. I find the excess return on net operating assets (the difference between the core return on net operating assets and the required return) and then discount it. More information can be found in my previous article .
Valuation Inputs And Results
It seems that Porsche AG will reach its yearly target in sales, for the forecasted period 41 billion EUR in sales for this year and a slight increase for coming years were used. ROS I used only from core sales, excluding interest income and other equity gains.
2022 | 2023 | 2024 | 2025 | |
Gross Margin | 28% | 29.7% | 30.7% | 31.7% |
ROS | 18% | 19% | 20% | 21% |
Total operating expenses | 10% | 11% | 11% | 11% |
Tax rate | 30% | 30% | 30% | 30% |
Sales | 37630 | 41000 | 42000 | 42840 |
In Millions of Euro (EUR)
My forecast is in line with the company's view of ROS reaching 19% in 2023, 20% in 2024, and surpassing 20% afterward. Using past statements' composition, I forecasted future return on net operating assets. WACC discount rate is equal to 7.53% , representing the current market condition and premium for risk. The growth rate used for a continuing value is an average real German GDP growth rate .
2022 | 2023E | 2024E | 2025E | |
Return on Net Operating Assets (RNOA) | 24.1% | 27% | 29% | 30% |
Residual operating income (ReOI) | 3264 | 3934 | 4332 | 4715 |
Growth in ReOI | 0.205 | 0.101 | 0.09 | |
Discount rate | 1.075 | 1.156 | 1.243 | |
Discounted ReOI | 3658 | 3747 | 3793 | |
Total Present Value of ReOI | 11198 | |||
C ontinuing Value ((CV)) | 86974 | |||
PV of CV | 69952 | |||
N et Operating Assets ((NOA)) | 20043 | |||
Value of operations | 101193 | |||
Net Financial Obligations | 3317 | |||
Value of equity | 97832 | |||
Number of shares | 911 | |||
Value per share | 107.4 | |||
In Millions of Euro (EUR) except per share items |
To find Residual operating income depicts the difference between RNOA and required return earned on NOA, or stream of future excess returns on NOA. Summing ReOI with Continuing Value and current NOA, deducting minority interest and net financial obligations, I came to a price of 107.4 EUR per share.
Valuation risk
Because my growth rate is only a three-year average, even a slight change will affect the price. If the growth rate continues to rise this year, it will result in a higher price target. Due to accounting principles, some of the figures I used in my reformulation might be slightly off, but I tried to minimize their influence. The latest quarter statements lack some disclosure, for example, some of the provisions lumped in "other liabilities" -- although this had only a minor effect on my calculations. WACC calculations are outsourced, but reasonably match my own.
Conclusion
It may seem like a "Buy" with today's EUR/USD exchange rate of 1.09 , the price target is 117 USD, but don't be fooled. The calculations above are for all common stocks, while Porsche AG sells you the preferred one. Those stocks have no voting rights and combine the characteristics of common stocks and bonds, thus having a discount on their market value compared to ordinary stocks. Despite the increasing sales and margins, all these factors are priced in and there are no clear indications for the preferred stocks to rise. Taking into consideration all written and exchange rate risks, it is a "Hold".
For further details see:
Porsche AG: Limited To Grow, Hold For Now