Porsche SE – The most efficient automaker in the world. Analysis by Sascha Seiler.
1. Business description
Porsche (Ticker: PAH3) is an automaker with a unique position in the industry. It dominates the market for luxury sports cars which enables the company to post high returns on invested capital having significantly higher profit margins than every other automaker in the world.
David Einhorn bought stocks at significantly higher levels than what we currently see. With tight monetary policy in Europe and the fed printing money it is obvious to look at undervalued international companies as well as American companies with heavy international sales, in order to protect the portfolio from monetary depreciation.
Porsche got into troubles in the 90s when the USD depreciated making the company selling cars below costs in the US . In these days their cars (Porsche 944) have been relatively unattractive. Paired with high production costs and a weak salesforce made up for an explosive mix bringing the company to the verge of bankruptcy. With new management Porsche then managed to turn the business around spectacularly. They cut costs via outsourcing to excellent partner firms and became the most efficient automaker in the world. They build up a strong salesforce and created a worldwide recognised sportscar brand. Around their core model the 911 they launched new and very successful models, first the Boxter then the Cayenne . With the latter one they were able to break through 7bn€ worth of sales. More important however they were able to be successful on the SUV market which actually is a big surprise for a sportscar producer. Now one can only speculate if they will be able to reproduce this success with the Panamera (a sports sedan).The odds however seem to be in Porsches favor: Many BMW,Audi and Mercedes clients will at least think about purchasing a "more exciting & extravagant" Porsche Panamera.
2. Volkswagen (VW)
In 2006 Porsche started to accumulate a stake in VW for mainly two reasons: Firstly VW and Porsche work together and Porsche wanted to ensure that VW didn‘t get split into pieces by possible investors. Secondly Porsche believes to be able to make VW as profitable as Toyota and therefore sees this partnership as highly valuable. Meanwhile Porsche has a controlling interest (50%) in VW which equals 36% of total capital due to outstanding preferred shares without voting rights. Now obviously the future success of Porsche will be closely linked to the fortune of VW. The potential earnings power of the aforementioned 100+ billion dollar sales company is tremendous: If they would be able to earn their 6% 2007 pre tax sales margin sustainable throughout one economic cycle Porsche would have purchased the business at a very reasonable price. For the 36% total interest they paid less than 15bn€ which equals 7 times pre tax earning power. That however is far from certain: In the past VW has been struggling with overcapacity and intense competition which led to meager returns. In this context it would obviously be very helpful if GM and Ford would finally go bankrupt.
Good Case: GM & Ford go bankrupt and VW streamlines the production
Bad Case: US-automakers survive and flood the market with overcapacity
In general VW is in a very tough business and it is very insecure whether the conditions will change for good in the next years. Consequently it is uncertain whether Porsche management can turn the business around: When brilliant management tackles a mediocre business it is usually the reputation of the business that remains intact.
Conclusion: Porsche has a durable economic moat which protects the company from competitors and secure good returns on invested capital. This cannot be said of Volkswagen. The nature of their business is poor due to tremendous competition and short product cycles.
3. Evaluation
Porsche earnings power: The company has historical EBT margins of 7 to 19%. The median margin is 14.3% when the last two years are left out of the examination due to unsustainable high returns from the VW acquisition. This conservative measure multiplied with sales of 7.4bn€ leads to an educated guess of normalized pre tax earnings power of 1.06 bn€ (=0.143*7.4).
If we argue that total enterprise value (=market cap+debt-cash) shouldn‘t be more than 10 times pre tax earnings power of 1.06 bn€ we arrive at intrinsic value of 10 bn€ (10+4.5-3.9=10.6)
We can now model in a deep recession to make sure that we don‘t be overly optimistic. Assumptions: Sales decline by 20% for two years and EBT margin consequently declines to 10%.
In 2011 we come out of the recession and sales increase with the introduction of the Panamera.
Discounted to the present day (10% discount rate) the cashflow is worth 3.5 bn€.
Assuming no further growth the value of all following cashflow would be 8 bn€.
This consequently adds up to enterprise value of 11.5 bn€ or intrinsic value of 10.9 bn€ in effect.
Now on what are these assumptions grounded? I believe that a Porsche can only hardly be substituted (There‘s no competitor in terms of volume). Furthermore the customers actually don‘t care a lot about the price but much more about the image of the automobile they purchase. In effect prices can be higher leading to healthier margins than in the much more competitive "bread and butter" automobile industry (in which VW is engaged in!)
Volkswagen: The company has a historical, median EBT margin of 2.5%. Multiplied with 100 bn€ sales (10% decline due to recession already build into valuation) we arrive at pre tax earnings power of 2.5 bn€. With the company‘s heavy debt load (40 bn€ net debt) we assume a cautious multiple of 8 to arrive at intrinsic value of 20 bn€. Alternatively we take book value (e.g. arguing that the business could be liquidated at that level) to arrive at 32 bn€ intrinsic value. Obviously there‘s a wide gap between these two numbers. We will conservatively assume the worst and take the low number: 36% Porsche interest*20 bn€ = 7.2bn€
Combined Value: 10 bn€ + 7.2 bn€ = 17.2 bn€ (intrinsic value per share: 98.3 €)
Conclusion:
At current levels (55 € per share) the company is selling for 56% of my best estimate of the intrinsic value of the company. The margin of safety on this investment seems to overcompensate the uncertainty with regard to the development of VW. One should also notice that the upside potential is very high as I was extremely careful with the valuation of VW. If VW stake would be valued @ book value (which is still conservative in my opinion) intrinsic value per share increases to 123 €.
Written up by Sascha Seiler
1. Business description
Porsche (Ticker: PAH3) is an automaker with a unique position in the industry. It dominates the market for luxury sports cars which enables the company to post high returns on invested capital having significantly higher profit margins than every other automaker in the world.
David Einhorn bought stocks at significantly higher levels than what we currently see. With tight monetary policy in Europe and the fed printing money it is obvious to look at undervalued international companies as well as American companies with heavy international sales, in order to protect the portfolio from monetary depreciation.
Porsche got into troubles in the 90s when the USD depreciated making the company selling cars below costs in the US . In these days their cars (Porsche 944) have been relatively unattractive. Paired with high production costs and a weak salesforce made up for an explosive mix bringing the company to the verge of bankruptcy. With new management Porsche then managed to turn the business around spectacularly. They cut costs via outsourcing to excellent partner firms and became the most efficient automaker in the world. They build up a strong salesforce and created a worldwide recognised sportscar brand. Around their core model the 911 they launched new and very successful models, first the Boxter then the Cayenne . With the latter one they were able to break through 7bn€ worth of sales. More important however they were able to be successful on the SUV market which actually is a big surprise for a sportscar producer. Now one can only speculate if they will be able to reproduce this success with the Panamera (a sports sedan).The odds however seem to be in Porsches favor: Many BMW,Audi and Mercedes clients will at least think about purchasing a "more exciting & extravagant" Porsche Panamera.
2. Volkswagen (VW)
In 2006 Porsche started to accumulate a stake in VW for mainly two reasons: Firstly VW and Porsche work together and Porsche wanted to ensure that VW didn‘t get split into pieces by possible investors. Secondly Porsche believes to be able to make VW as profitable as Toyota and therefore sees this partnership as highly valuable. Meanwhile Porsche has a controlling interest (50%) in VW which equals 36% of total capital due to outstanding preferred shares without voting rights. Now obviously the future success of Porsche will be closely linked to the fortune of VW. The potential earnings power of the aforementioned 100+ billion dollar sales company is tremendous: If they would be able to earn their 6% 2007 pre tax sales margin sustainable throughout one economic cycle Porsche would have purchased the business at a very reasonable price. For the 36% total interest they paid less than 15bn€ which equals 7 times pre tax earning power. That however is far from certain: In the past VW has been struggling with overcapacity and intense competition which led to meager returns. In this context it would obviously be very helpful if GM and Ford would finally go bankrupt.
Good Case: GM & Ford go bankrupt and VW streamlines the production
Bad Case: US-automakers survive and flood the market with overcapacity
In general VW is in a very tough business and it is very insecure whether the conditions will change for good in the next years. Consequently it is uncertain whether Porsche management can turn the business around: When brilliant management tackles a mediocre business it is usually the reputation of the business that remains intact.
Conclusion: Porsche has a durable economic moat which protects the company from competitors and secure good returns on invested capital. This cannot be said of Volkswagen. The nature of their business is poor due to tremendous competition and short product cycles.
3. Evaluation
Porsche earnings power: The company has historical EBT margins of 7 to 19%. The median margin is 14.3% when the last two years are left out of the examination due to unsustainable high returns from the VW acquisition. This conservative measure multiplied with sales of 7.4bn€ leads to an educated guess of normalized pre tax earnings power of 1.06 bn€ (=0.143*7.4).
If we argue that total enterprise value (=market cap+debt-cash) shouldn‘t be more than 10 times pre tax earnings power of 1.06 bn€ we arrive at intrinsic value of 10 bn€ (10+4.5-3.9=10.6)
We can now model in a deep recession to make sure that we don‘t be overly optimistic. Assumptions: Sales decline by 20% for two years and EBT margin consequently declines to 10%.
In 2011 we come out of the recession and sales increase with the introduction of the Panamera.
| Year | Sales | EBT margin | EBT (bn€) | EBT accumulated (bn€) |
| 2009 | 6bn€ | 10% | 0.6 | 0.6 |
| 2010 | 6bn€ | 10% | 0.6 | 1.2 |
| 2011 | 7bn€ | 15% | 1.05 | 2.25 |
| 2012 | 8bn€ | 15% | 1.2 | 3.45 |
| 2013 | 9bn€ | 15% | 1.35 | 4.8 |
Discounted to the present day (10% discount rate) the cashflow is worth 3.5 bn€.
Assuming no further growth the value of all following cashflow would be 8 bn€.
This consequently adds up to enterprise value of 11.5 bn€ or intrinsic value of 10.9 bn€ in effect.
Now on what are these assumptions grounded? I believe that a Porsche can only hardly be substituted (There‘s no competitor in terms of volume). Furthermore the customers actually don‘t care a lot about the price but much more about the image of the automobile they purchase. In effect prices can be higher leading to healthier margins than in the much more competitive "bread and butter" automobile industry (in which VW is engaged in!)
Volkswagen: The company has a historical, median EBT margin of 2.5%. Multiplied with 100 bn€ sales (10% decline due to recession already build into valuation) we arrive at pre tax earnings power of 2.5 bn€. With the company‘s heavy debt load (40 bn€ net debt) we assume a cautious multiple of 8 to arrive at intrinsic value of 20 bn€. Alternatively we take book value (e.g. arguing that the business could be liquidated at that level) to arrive at 32 bn€ intrinsic value. Obviously there‘s a wide gap between these two numbers. We will conservatively assume the worst and take the low number: 36% Porsche interest*20 bn€ = 7.2bn€
Combined Value: 10 bn€ + 7.2 bn€ = 17.2 bn€ (intrinsic value per share: 98.3 €)
Conclusion:
At current levels (55 € per share) the company is selling for 56% of my best estimate of the intrinsic value of the company. The margin of safety on this investment seems to overcompensate the uncertainty with regard to the development of VW. One should also notice that the upside potential is very high as I was extremely careful with the valuation of VW. If VW stake would be valued @ book value (which is still conservative in my opinion) intrinsic value per share increases to 123 €.
Written up by Sascha Seiler
