As we all know, Porsche (OTCPK:POAHY) is part of the Volkswagen Group (OTCPK:VWAGY), the second largest carmaker in the world. It is a luxurious carmaker with a strong focus on electric vehicles. At the same time, the management does not put all "eggs in one basket". The company also produces traditional sports cars. But there is a lot of emphasis on innovations, new products and technologies. One of the most vivid examples that comes to mind is Porsche's co-operation with Boeing (BA) to develop urban air vehicles. This technical brilliance comes at undemanding valuations that I will discuss in this article.
Volkswagen and Porsche
To start with, Porsche is heavily linked to the second largest carmaker in the world. Only Toyota is slightly superior to Volkswagen according to its sales revenue figure.
Source: Statista.com
Porsche owns 53.3% of ordinary shares at Volkswagen. So, the financial performance of one company has a significant effect on another company's stock.
Source: Porsche's web-site
Credit rating agency Moody's confirmed Volkswagen's upper medium grade credit rating. Indeed, best-in-class companies tend to be highly safe. Moreover, quite recently Volkswagen's CEO announced job cuts. Even though it is sad that people are losing their jobs, it will make the company more cost efficient and also allow Volkswagen to conserve cash.
This is also good news for Porsche as it is Volkswagen's main shareholder.
Financial results
I appreciate that it might take some time for Porsche to fully recover its sales after the coronavirus outbreak. However, the company as part of Volkswagen Group is financially sound.
As can be seen from the graphs below, Porsche has been gradually growing its sales and profits. This suggests some stability for the company.
Source: Porsche's web-site
Source: Porsche's web-site
Year 2019 was tough for carmakers. Even though the stock markets around the world rallied, the car sales were flat in many countries. However, Porsche's sales revenue growth was quite impressive. It totaled 11%. The operating profit before special items was not that impressive. It only rose by 3%. Nevertheless, it was due to high fixed costs. The company invested heavily in infrastructure necessary for producing electric vehicles. Such investments are normally long term. So, I do not think that the fixed costs will be that high this year or next year.
I always become cautious when I read about "special items". Managements often talk about "special items", "non-recurring expenses" and "one-offs" when they try to hide their own poor performance. However, now it does not seem to be that way. It was the diesel issue that led to a €0.5bn charge. We all remember the 2015 Volkswagen emissions scandal resulting from emissions-cheating diesel engines. In second quarter of 2019 Porsche also had to pay €0.5 bn in fines for its involvement in the scandal. But it does seem to be a non-recurring item since Porsche no longer produces diesel vehicles.
Some might argue that the diesel scandal makes investing into Volkswagen or Porsche look undesirable or even risky due to its poor reputation. I disagree. Not only were the appropriate measures taken to prevent this happening in the future, the Group also showed financial resilience. Not only did it manage to survive, it also began to flourish after the environmental scandal was over.
Source: Porsche's web-site
Porsche also has an impressive product portfolio. In 2019 alone it launched 23 models. They included traditional sports cars, hybrid and electric vehicles, whereas the three Taycan models are all-electric vehicles. Porsche's exposure to electric vehicles is quite appealing for investors because governments around the world invest heavily in infrastructure for all-electric vehicles. They are considered to be the future of private transportation.
Equity valuation
Although the most recent rally in equities had a dramatic positive effect on the stock's performance, if we compare the current stock price to what POAHY used to trade for, it still looks like a bargain.
Data by YCharts
If we calculate the price-to-earnings ratio of the company for 2019, we will come up with the following figure:
Net profit =€3.86bn
Total shares outstanding =€153m
€3.86bn/153m will get us €25 per share
Taking the stock price of €57 (it is a European stock quote) and dividing it by €25, we will get 2.28 which is extremely low. I appreciate that the EPS will not be the same this year as in 2019 but the stock still looks cheap to me.
Data by YCharts
The same seems to be true of the book value per share valuation. It is not at record lows. But at the same time the book value is two times higher than the stock price. It is not demanding as can be seen from the graph above.
Data by YCharts
The dividend yield is obviously below the March highs. However, the current dividend yield of almost 4% is over and above S&P 500's average of about 2%.
Management and corporate governance
One of the main drawbacks of modern corporations is divorce between ownership and control. This refers to a situation when a company is controlled by a board of directors but owned by a large number of dispersed minority shareholders. This is why the shareholders cannot control the management's actions and therefore have to be passive.
The problem is more typical of US companies than European ones. It is pretty common for some European companies to be owned and controlled by the same family. By this I mean that members of the board of directors are quite commonly the major shareholders holding over 50% of common stock.
This is quite the case with Porsche. In 1948 the company was established by Ferdinand Porsche. Nowadays, Dr. Wolfgang Porsche is head of the family controlling the whole Volkswagen Group, including Porsche. At the same time, he is Chairman of the Supervisory Board at Porsche. Even though he is a non-executive director, he is still an influential insider there.
The point I am making is that it is in his direct financial interests to serve the company, thus benefiting other shareholders. This does not seem to be the case with other corporations controlled by directors but owned by minority shareholders. In such a situation many directors tend to pay themselves highly generous bonuses and reward themselves with stock options, thus diluting other shareholders' holdings. This is because in such a company shareholders' and directors' interests conflict. But it does not seem to be the case with Porsche and Volkswagen Group.
Conclusion
It is highly challenging to guess where the stock price will head next. There are many macroeconomic and geopolitical risks. The world's economy has not fully recovered from the coronavirus pandemic. However, I still see great upside potential for POAHY. It is a classical buy and hold stock available at undemanding valuations. It offers stability of earnings, innovations, dividends and good management. At the same time it trades at low multiples.
