Buy Volkswagen shares. Porsche’s IPO could unlock value as Tesla Challenger emerges.
With the exception of
Automakers are out of favor with investors. Their stocks feature some of the lowest price/earnings multiples in the stock market. Concerns include a costly transition to electric vehicles over the next decade and the sustainability of currently high profitability with a potential recession looming in late 2022 or 2023.
(ticker: VOW3.Germany), the world’s largest automaker by annual sales, with $275 billion, is a perfect example. Its U.S.-listed Volkswagen (VWAPY) preferred stock — effectively non-voting common stock — is down 25% this year to $15, and trades for just four times projected 2022 earnings from 3 $.50 per share. The shares are yielding 5% based on VW’s annual dividend, paid earlier this year.
Volkswagen plans to remedy its low valuation with an IPO in late September or early October of a 25% stake in its Porsche division. A successful bid would be a positive catalyst for VW shares.
The U.S.-listed automaker’s common stock (VWAGY) is trading for around $19. Preference and ordinary shares are each equivalent to 1/10th of a share listed in Germany.
Porsche could be valued between $60 billion and $85 billion, according to published reports, close to Volkswagen’s current market value of $87 billion. Porsche is the most valuable part of Volkswagen’s impressive automotive portfolio, which includes its mainstream VW brand, its premium Audi unit and its ultra-premium Bentley and Lamborghini brands.
Porsche is a leading luxury car maker, producing the 911 and 718 sports cars, the popular Cayenne and Macan sport utility vehicles, the Panamera sedan and the all-electric Taycan, introduced in 2019, which rivals the Tesla model (TSLA) S. Porsche produces about 300,000 vehicles a year, which average around $100,000 each. It boasts an enviable operating profit margin of 20%.
Porsche generated 25% of Volkswagen’s $13 billion operating profit in the first half of 2022, meaning investors could effectively pay little for the rest of the company’s profits. Porsche could be valued at 15 to 20 times net profit. It’s a discount for the high-end luxury automaker
(RACE) 40 times, but well above the single-digit multiples of most auto stocks.
|Automaker/Ticker||Recent Price||Change since the beginning of the year||2022E EPS||2022E P/E||2023E P/E||Dividend yield||Market value (bil)|
|Ford/F engine||3:43 p.m.||-26||2.07||7.5||7.7||3.9||62.0|
“We see incredible value in VW,” says Lawrence Paustian, equity research analyst at Pzena Investment Management, which owns VW shares. He says VW is attractive, based on its earnings and a sum-of-the-parts analysis, and may be the incumbent best equipped to take on Tesla.
Morningstar analyst Richard Hilgert is bullish on VW, and he and Paustian favor the cheaper preferred shares. Hilgert has an equivalent target price of over $30 per US stock. “If any of the traditional automakers can catch Tesla, it’s VW,” says Hilgert.
Volkswagen is ahead of its rivals in developing electric vehicles and building battery factories. It has a strong balance sheet, with $28 billion in net cash in its automotive business.
The stock’s low valuation reflects the industry’s challenge to go all-electric in the next 15 to 20 years. Then there’s VW’s complex corporate and governance structure.
VW expects to be able to produce one million electric vehicles in 2023 and possibly two million by 2025, while Tesla could sell more than four million.
It is unlikely that Porsche’s IPO will be followed by a distribution of the remaining 75% stake to shareholders, given Porsche’s integration into VW. It’s a slight negative.
VW is controlled by the Porsche and Piech families, which hold a 50% stake in
Porsche Automobil Holding
(PAH3.Germany), owner of 53% of the voting shares of VW. Investors can also play VW through the non-voting shares listed in the United States (POAHY), recently around $6.
Porsche Automobil is trading at an estimated 30% discount to the value of its VW stake, but has billions of dollars in potential legal liabilities from its failed takeover bid for VW more than a decade ago. and VW’s “dieselgate” scandal that began in 2015. Porsche Automobil plans to buy 12.5% of Porsche’s IPO.
Like other large German companies, VW has a 20-member supervisory board, half elected by shareholders and half by workers. But two of the shareholder representatives are appointed by the German state of Lower Saxony, where VW is based, and they tend to support the work. Lower Saxony owns 20% of VW’s voting shares. This has made it difficult for VW to cut labor costs, which could be a challenge as the industry shifts to making less labor-intensive electric vehicles.
Still, VW emerges as a legitimate challenger to Tesla. He has a top brand, a cheap stock and now, a possible catalyst to create value.
Write to Andrew Bary at [email protected]