At first glance it may look like an odd time to pitch Porsche AG (P911:ETR) to readers, but we have seen many times that fundamentally good companies can be picked up on the relative cheap during testing times, and that’s the scenario we now believe is in front of investors.
The shares trade under the name of Dr ING F Porsche AG, which is a mouthful, so we’ll refer to the company as Porsche AG, but interested readers should take note when it comes to searching for the stock on your chosen investment platform.
Porsche AG is a fundamentally sound business with robust finances, good growth opportunities and excellent returns metrics. It is also a highly aspirational worldwide sports car brand, one that is embracing electrification in a sensible way.
Yet the shares have drifted below their 2022 €82.50 IPO (initial public offering) price leaving them trading on a discounted rolling 12-month PE (price to earnings) multiple of barely 13, according to Stockopedia data.
WHY HAVE THE SHARES STRUGGLED
Like most luxury brands, sales into China have been sluggish for a while. As competition in the Chinese car market intensifies, Porsche AG is facing significant growth pressure. In 2023, global sales rose 3.3% to 320,221 units but those in China dropped 15% to 79,283 units. Porsche’s global sales fell 7% to 155,945 units in the six months to 30 June 2024 year-on-year, but sales in China tumbled 33%.
This has been compounded by the flooding of a key aluminium supplier’s production facility which has put the squeeze of various parts. Bernstein analysts said the flooding occurred at a Swiss supplier and would lead to the production loss of something like 10,000 to 17,400 vehicles in the second half of 2024.
This means that Porsche AG now expects sales between €39 billion and €40 billion, versus between €40 billion and €42 billion previously.
Porsche is also struggling with lower than anticipated electric vehicle sales this year, forcing it to water down its EV ambitions.
EARNINGS UNCHANGED, NEW MODELS LAUNCHING
So, what’s the good news? For a start, Porsche SE (PAH3:ETR), the holding company of the Porsche and Piech families that control Volkswagen (VOW3:ETR) and hold a complex blocking minority in Porsche AG, confirmed its 2024 earnings forecast despite the alloy supplier’s warning.
Porsche AG has also appointed a new China chief executive to reverse the China sales declines. Alexander Pollich, an international sales expert, has been with Porsche for more than 23 years, most recently running the German sales operation. In stark contrast to volume declines elsewhere, under Pollich’s leadership, German sales jumped 22% in the first half of 2024, offering promise of a China reversal.
On the EV side, part of the problem has been reduced government subsidies, pushing consumers back to petrol or hybrid models. Germany axed its subsidy programme last December, a year earlier than planned, for example. New models could help address this, and wider sales drift problems.
During 2024 and 2025, Porsche is rolling out nine model refreshes, including a full electric Macan SUV, a Cayenne Hybrid Electric SUV and, next year, an E-Hybrid Panamera plus the exciting eighth iteration of its iconic 911 sports car, the model which made Porsche the aspirational heritage brand that it is today.
This should help pricing and partly mitigate any ongoing supply chain pressures, a problem that Porsche has had to deal with previously and one which we would hope to see addressed in the coming months.
According to data from Visual Capitalist, Porsche has the fourth highest car brand loyalty based on customers who would buy again, higher than Tesla (TSLA:NASDAQ) (5th) and Lexus (7th) – Ferrari was not listed.
RISK ADJUSTED RETURNS STORY
Buying Porsche AG shares is far from risk-free. Supply chains issues may continue to hound the company, EV sales may recover slower than hoped, while Pollich could find the challenges in China far from simple to overcome.
That said, this is a proven high-quality business with merits more attuned to Ferrari (RACE:BIT) – the name in premium sports cars – rather than Aston Martin (AML). Porsche aims to push operating margins, forecast at 14% to 15% this year (to 31 Dec) towards 20% over the medium-term, and with new model waiting times of three months or more, it means it gets cash commitments upfront and early on each sale.
Margins may also benefit from a shared SUV and EV production platform with VW, which mean it should benefit from the latter’s $5 billion software-sharing investment deal with US EV firm Rivian (RIVN:NASDAQ), signed in June 2024. Finally, returns on capital and equity have averaged 16% and 21% respectively over the past seven years, yet were 19.1% and 26.1% last year, demonstrating the improving quality of the business.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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