Porsche Holding Is A Potential Value Trap To Avoid (OTCMKTS:POAHF)

Porsche Holding (OTCPK:POAHY) (OTCPK:POAHF) is a German holding company operating in the automotive sector. Its two main subsidiaries are Volkswagen (31.9% of total capital) and Porsche Auto (12.5% ​​of total capital). The company also holds a diversified investment portfolio, though its impact on the financial performance is limited.

Porsche Holding generates the majority of its sales in Europe (80.4%), but it also has an exposure in Asia (11.2%) and North America (6.5%).

Having reached its highest value since 2008 in June 2021, the stock entered a downward trend, underperforming the Stoxx Europe 600 Auto Index by nearly 60%.

This underperformance began after Porsche AG’s IPO in September 2022. Prior to this, Porsche Holding was the sole way for investors to gain exposure to premium global car manufacturers that were not publicly traded. Following Porsche AG’s listing, investors gained the ability to invest directly in the company’s two main assets, Volkswagen and Porsche AG, without using the holding company.

As a result, the NAV discount widened, reaching 50% by the end of 2023, based on the company’s estimates. As of June 30, the discount stood at 40%, compared to a long-term average of 33%.

We now believe that investors will primarily focus on Porsche Holding’s dividend, based on the earnings generated by its two operating subsidiaries. Due to the holding discount, the company has the potential to offer higher dividend yields. However, in the short term, the company’s EUR 5 billion debt could reduce its payout. Based on 2024 consensus estimates, Porsche Holding is expected to pay a 6.4% dividend yield, compared to 8.5% for Volkswagen and 3.2% for Porsche AG.

In H1 2024, Porsche Holding’s investment income declined from EUR 2.474 billion in H1 ’23 to EUR 2.271 billion, with both Volkswagen (from EUR 7.5 billion to EUR 6.4 billion) and Porsche (from EUR 2.8 billion to EUR 2.2 billion) posting weaker results after tax and non-controlling interests.

Investment thesis

Although Porsche Holding’s current stock valuations may appear very attractive ​​(2024 P/E estimate of 2.6x), we believe it will continue to face negative pressures from the worsening outlook for the automobile market.

We expect the recent signs of economic softening in the USA and Europe, as well as continued weakness in China, to weigh on the auto sector’s performance. The graph below shows that the European auto sector’s performance is closely correlated with the German IFO business confidence index, which remains at historically low levels. This indicates a likely negative trend for the sector in the coming months.

We foresee continued downward revisions in earnings estimates for Volkswagen and Porsche AG as the main risks for their stocks over the next few years.

For Volkswagen, both US and European sales could be hit by an economic slowdown and rising inventories, resulting in lower profit margins. Sales in China could also remain weak, as highlighted by BMW’s recent profit warning. Additionally, Volkswagen may continue losing market share to local competitors, particularly in the electric vehicle sector. Volkswagen’s market share in China fell from 19.3% in 2020 to 14.5% in 2023, and its goal of maintaining a 15% share by 2030 seems overly ambitious in this environment. The need for greater investment in electric vehicles, to keep pace with Chinese competitors and meet European regulatory requirements, further weighs on the company’s outlook.

Porsche may also be affected by a slowing car demand over the coming quarters. However, the launch of new models in H2 2024 could provide some support to sales. Porsche’s July 2024 guidance revision (revenue of EUR 39-40 billion, down from EUR 40-42 billion, and return on sales of 14-15% down from 15-17%) due to supply chain issues may continue to affect its performance. In the medium term, the impact of R&D costs related to electric vehicles will need careful monitoring. Although moderate revenue growth is expected (driven by new electric models and emerging markets), rising costs could compress profit margins, challenging Porsche’s ability to meet investors’ profit growth expectations.

Valuation

We think that investors will focus on the company’s dividend going forward, so we value Porsche Holding using a dividend discount model based on the following assumptions:

– Unchanged dividend in the period 2024–2026 at USD 0.28, in line with consensus estimates, to facilitate the company’s debt reduction process.

– A 6% annual growth in the following 7 years to reflect the positive effects of debt reduction.

– A 3% perpetual growth rate.

– A 10% cost of capital, in line with the company’s assumptions in H1 24 impairment tests.

It gives a stock valuation of USD 4.73/share, implying an 8.7% upside potential.

A multiple analysis shows a similar upside potential. The 2024 estimated P/E is 2.6x, compared to a 5-years average of 4.6x. However, compared to the last two years P/e number (3.3x in 2022, 2.8x in 2023) the change is limited. At a target P/E ratio of 3.0x, the stock upside potential would be slightly more than 10%.

The view from The Street

The analysts’ view on Porsche Holding is split, with 5 rating it buy, and 6 rating it hold. Despite the stock’s marked decline since 2021 and a significant target price reduction (from EUR 115.18 at 2021-end to the current EUR 53.95), no analysts have a SELL recommendation on the stock.

Conclusion

Porsche Holding’s shares may seem attractive with an estimated 2024 P/E multiple of 2.6x, significantly lower than the 5-year average. However, we believe the company faces several short-term risks, including slowing sales, as well as medium-term risks such as increased investments in electric vehicles and growing competition from Chinese competitors. These factors could lead to further downward revisions in estimates for the coming years. The DDM analysis shows limited upside potential unless there is a strong improvement in long-term growth prospects.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.