Volkswagen is one of the cheapest stocks. A Porsche IPO could change that.
With the ecxeption of
Automakers have fallen out of favor with investors. Their stocks boast some of the lowest price-to-earnings multiples in the stock market. Concerns include an expensive transition to electric vehicles over the next decade and the sustainability of the current strong profitability in a potential recession that looms in late 2022 or 2023.
Volkswagen (Ticker: VOW3.Germany), the world’s largest automaker with annual sales of $275 billion, is a prime example. U.S.-listed Volkswagen preferred stock (VWAPY) — effectively non-voting common stock — is down 25% this year to $15 and is trading at just four times 2022 earnings forecast of $3.50 per share . The shares yield 5% based on VW’s annual dividend, which was paid earlier this year.
Volkswagen plans to counter its low valuation with an IPO of a 25% stake in its Porsche division in late September or early October. A successful bid would be a positive catalyst for VW stock.
The automaker’s US-listed common stock (VWAGY) trades for around $19. Preferred and ordinary shares each correspond to 1/10 of a share listed in Germany.
Porsche could be valued at $60 billion to $85 billion, according to published reports, which is close to Volkswagen’s current market value of $87 billion. Porsche is the most valuable part of Volkswagen’s impressive automotive portfolio, which includes the mass-market VW brand, premium unit Audi, and ultra-high-end brands Bentley and Lamborghini.
Porsche is a leading manufacturer of luxury cars, producing the 911 and 718 sports cars, the popular Cayenne and Macan SUVs, the Panamera sedan and the all-electric Taycan, launched in 2019 to compete against the Tesla (TSLA) model S. Porsche produces about 300,000 vehicles per year, which sell for an average of nearly $100,000 each. It has 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 earnings. That’s a discount for high-end luxury automakers
(RACE) 40 times, but well above the single-digit multiples of most auto stocks.
|Automaker / Ticker||Current price||YTD change||2022E EPS||2022E P/E||2023E P/E||dividend yield||Market value (bn)|
“We see incredible value in VW,” says Lawrence Paustian, an equity analyst at Pzena Investment Management, which holds VW stock. He says VW is attractive, based on its earnings and an aggregate analysis, and may be the best-equipped incumbent to take on Tesla.
Morningstar analyst Richard Hilgert is bullish on VW, and both he and Paustian favor the cheaper preferred shares. Hilgert has a target price of the equivalent of more than $30 per US share. “If one of the traditional car manufacturers can catch up with Tesla, it’s VW,” says Hilgert.
Volkswagen is ahead of the competition when it comes to 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, when Tesla could sell over four million.
Given Porsche’s integration into VW, it’s unlikely that the remaining 75% stake will be distributed to shareholders after Porsche’s IPO. That’s a slight negative.
VW is 50% controlled by the Porsche and Piech families
Porsche Automobile Holding
(PAH3.Germany), owner of 53% of the voting shares of VW. Investors can also play VW through US-listed preferred stock (POAHY), which was last priced around $6.
Porsche Automobil trades at an estimated discount of 30% to the value of its stake in VW, but has potential billions of dollars in legal liabilities related to its aborted VW takeover bid more than a decade ago and VW’s “Dieselgate” scandal, which 2015 began. Porsche Automobil plans to buy 12.5% of Porsche IPO.
Like other large German companies, VW has a supervisory board with 20 members, half of whom are elected by the shareholders and half by the employees. But two of the shareholder representatives are nominated by the German state of Lower Saxony, where VW is based, and they tend to support the work. Lower Saxony owns 20% of the voting shares in VW. This has made it difficult for VW to reduce labor costs, which could be a challenge as the industry shifts to less labor-intensive electric vehicle manufacturing.
Nonetheless, VW is emerging as a legitimate challenger to Tesla. It’s got a blue-chip brand, a cheap stock, and now a possible catalyst for value creation.
write to Andrew Bary at [email protected]