Porsche: A Nice 6%+ Yield From One Of The Best Luxury Automobiles

seekingalpha07-02

Despite current issues, Porsche as a luxury brand like Ferrari may see upside due to demand for high-level products.Porsche had a rough 2023 and may see earnings drop in 2024, but improved bottom-line...

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Brandon WoyshnisDear readers/followers, Porsche (OTCPK:POAHY) didn't have a great 2023, and as things look right now, earnings in 2024 might drop as well. However, the company improved bottom-line margins and operating profit at an impressive level, and there's of course the elephant in the room that Porsche as a luxury brand, much like companies like Ferrari (RACE), will have some upside due to the demand for their high-level products. Current challenges for Porsche do exist, and these are likely weighing on the bottom line, among these the company's investments in new models and BEV technology come at a price, impacting the bottom line. However, despite these issues, related to the cyclical environment and ownership structure, Porsche's brand image and global presence offer upside potential. In this article, I mean to update why I invest capital in Porsche, and why I am happy holding the company even during a decline, potentially even adding more. As an investor, my clear focus lies in investing in quality companies at cheap prices. I have been covering, this week, a number of French companies that I believe offer incredible upside for the price at which they currently trade. In this article, which is a followup to the article you can find here, it's time to look at a German \"giant\". Let's see what we have here. Porsche - Plenty of Upside, if the company turns around I haven't often covered Porsche over the past few years. This has to do with my overall stance on investments like this. Porsche, like Volkswagen (OTCPK:VWAGY) is more of an income investment to me than it is a value investment with a capital appreciation upside. There is some of that in there, but for the most part, I'm looking for yield coupled with that upside - and I'm mostly getting it as well. 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%, as I covered in my previous piece. Looking at the latest sort of results we have here. We have 1Q24 results presented during late April, and 2Q24 fairly close - so we'll see what we can deduce from these. For 1Q24, company highlights include a new successful presentation launch of the EV versions of both the Taycan and Macan models - but overall group performance was hampered by some issues with availability, which resulted in poor fixed cost coverage. However, none of this negativity translated into guidance, where the company still believes in a very strong order book, and improved availability of new models providing a very solid foundation for sequentially improved unit sales, revenues and rising profitability for the remainder of the year.   Porsche IR (Porsche IR)As we can see in the company results, we have a slightly lower EBITDA margin, and overall lower numbers compared to the former year - which also explains the double-digit drop in share price that we've seen since the publication of this piece. Since my last article, the company is, in fact, down 12%, which is noteworthy for Porsche or any company like this. Given these results, however, I can see why analysts and the market overall might be a bit concerned, as a 400 bps RoS is not small, and a double-digit revenue decline for a company like this needs to be qualified - not to mention a 30%+ decline in EBIT. However, most of the company's fundamentals are intact at a level that would give me very little worry here. We're talking significant net liquidity - over €7.2B, which enables Porsche to do more or less what it \"wants\", as well as a continuing push into R&D of over €1B and another €400M in CapEx.  The real issue during the quarter was vehicle availability. The company, other than this, provided very good strategic execution of its objectives and saw financial service operating profit at 6.3%. One other part that I'm very favorable about is that Porsche continues to push value over volume, among other things in China. Unlike some other companies, Porsche is still seeing disproportionately high material costs, elevated R&D, elevated D&A, and launch costs, but this has to do with the introduction of new vehicles, which has been frequent for the company during this year. The lack of availability has also impacted both automotive sales and automotive deliveries.   Porsche IR (Porsche IR)One interesting and noteworthy trend here is the company's BEV share of sales. I have made no secret of the fact that I do not particularly believe in the impending \"domination\" of BEV of the market. At best, I believe will be an acceptable solution for people in urban environments that travel sub-20 mile distances or so, with higher distances correlating to higher amounts of ICE-powered vehicles. Of course, I'm not blind to the fact that this unimpressive BEV number for Porsche, in particular, has a lot to do with the changeover of the Taycan as well as restrictions - but I believe there to be an amount in that figure as well that has to do with that people aren't as convinced by BEV's as some would like to believe. Speaking only for myself and anecdotally, I would never buy a BEV - and would rather buy a used 3-4-year-old ICE vehicle with low miles if and when I need a new car next to my own. Here's the company's current delivery mix.   Porsche IR (Porsche IR)Not much negative here, and the company's order \"bank\" remains attractively high, confirming the company's status as a desirable sort of manufacturer here. Still, the company, despite the confirmation, has a number of risks that we should at the very least be aware of prior to investment. Upside and Risk to Porsche The obvious risks to the company are related to the cyclical and capital-intensive environment where the company operates - as you can see in the quarterly results in how things are going for margins. Any production of inventory overcapacity or excess here is negative for the business, turning profits down - again, as you see in this quarter. Aside from this, there aren't many major risks that are operational, more \"structural\", as I would call them - such as the Porsche/Piesch family. Without exaggerating, this is essentially a family investment vehicle, and you will never have a say in Porsche. These owners can easily block major decisions for the company, which means that even if the company has capable management, they're not really in charge, they're more like Stewarts controlled by the family (if they do something the family does not agree with). Thirdly, and last, I would say that like with BMW (OTCPK:BMWYY), the company's risks are union-related.  Porsche's workforce is very heavily unionized - not only do they have heavy representation, but the union has board representation (again, just like BMW), 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. I continue to believe that the upside outweighs any downside here. Between Porsche's aforementioned premium/luxury brand image, its presence in a global market which reduces its demand on any one regional economy and improves overall growth prospects (just look at the mix on a geographic basis), along 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, and I would be lying if I said I hadn't ever considered a Porsche for the brand appeal (though not right now). This in turn brings us to valuation. Valuation for Porsche - The company has a double-digit upside I invest in the PAH3 ticker. This is the preferred stock, and it yields 6%+ compared to the 4% of the other ticker. You also get quite a bit of capital appreciation here that is somewhat atypical of a pref stock.   F.A.S.T graphs Porsche valuation (F.A.S.T graphs Porsche valuation)The company typically warrants a high P/E, and it's currently trading below this. The native price for the PAH3 ticker is now €43/share, and despite analyst targets having moderated from around €75/share average a year ago to around €60/share, this still implies a 43% upside at this price of €42.21/share. (Source: Paywalled TIKR.com Link). This is from a total of 10 analysts with a low of €45/share to a high of €100/share - so there's plenty of upside even if you only believe the company is worth the absolutely lowest sort of price here. 5 analysts are at \"BUY\" or equivalent - and I would understand why given the company's very recent downturn. Remember, and as you can see above, PAH3 has dropped from over €100/share to less than €50/share in around 4 years. While risks do exist for Porsche, as mentioned above, I view the near-term risks to this company as fairly limited - especially now given the price/valuation - 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. Evaluating or valuing Porsche is quite tricky. A DCF based on a discount of 8-9% with a growth rate in perpetuity of below 7% implies a fair value going up above €200/share. We could even bring this down by 50% and still see an over 50% upside. Even if you say, look at peers, such as Ferrari, Honda, Benz, or other automobiles with premium potential, a similar multiple in terms of Revenues would imply a share price or fair value of around €180 - yet again a massive upside. Any KPI you choose to look at here implies a massive upside to this company. I choose to stay conservative. My previous PT was €75/share, discounting any implied FV by 50-75%. I maintain this PT here and give you the following thesis for Porsche. 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 as of July of 2024.  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. 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