Why, after a fanfare debut, Porsche is disillusioned on the stock market

(BFM Bourse) – The high-end car manufacturer has been suffering for more than a year, weighed down by the weakness of the Chinese market but also a perception problem regarding its positioning. With the implicit question of whether or not it is a luxury brand.

In September 2022, the arrival on the stock market of Porsche was greeted with great fanfare by investors. The largest IPO in Europe for around ten years, the Volkswagen subsidiary (which still owns more than 75% of the capital) saw its action jump, going from an IPO price of 82.5 euros to peak of almost 121 euros in May 2023.

Remember that in the fall of 2022, the stock benefited from a form of “cannibalization”, investors selling the shares of the parent company (Volkswagen) to buy those of the subsidiary (Porche).

But the euphoria did not last for the high-end manufacturer. While “mass market” automobile groups had a magnificent 2023 vintage (Stellantis took 60%, the strongest performance in the CAC 40), Porsche fell by 16% and even more than 30% compared to its peak. may.

Porsche is now very far from Ferrari’s standards. Its action is barely processed 14.22

times the expected profits over twelve months (multiple which had risen to 20, approaching luxury standards) compared to 51 for the Italian group.

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China deflated valuation

At 81.6 euros, its price has fallen below its IPO price and its market capitalization (73.5 billion euros) is no longer far from that of Volkswagen (63 billion euros).

The Chinese economy has caught up with the German group at great speed. In the third quarter, the group’s vehicle deliveries fell by 40% in the world’s second largest economy, notes the independent research firm AlphaValue. Over the whole of 2023, these deliveries plunged by 15% in China and the company expects another difficult year in 2024.

Certainly, the group was able to mobilize its resources to fuel growth in other regions, a decision also taken to protect its prices.

But “ultimately, the key question is: how long will the rest of the world be able to make up for the missing Chinese demand?” AlphaValue worried in October. HSBC notes that Porsche has the highest exposure to China among luxury automakers (around 25%), which “probably” explains the stock’s fall.

Let us point out that apart from Ferrari, all the “premium” automobile groups are suffering in China. Aston Martin saw its deliveries fall by 55% in the third quarter, Bentley by 32%, Lamborghini by 26% and Rolls Royce by 16%, according to data compiled by the Sino-British establishment.

The electric Macan as a test

The postponement of the electric Macan, an SUV which will constitute the group’s second electric model after the Taycan, has not helped. A software problem at Volkswagen forced Porsche to postpone its launch to 2024, initially planned for 2023. The model was presented last week with first deliveries planned for the second half of the year.

Which will also test Porsche’s ability to extract a premium on prices in electric vehicles, a market in which doubts have accumulated at the start of the year, as evidenced by the 24% plunge in the share price. You’re here. According to UBS, Porsche wants to sell this electric version 15% more expensive than the thermal model.

Another market concern also comes from the group’s ability to raise its prices (“pricing”) and thus fuel its growth through value rather than volume. The company’s management has also stressed on several occasions that prices and mix (the distribution of sales towards more expensive and better-margined models) should constitute the main sources of improvement in its results.

“The problem is that they hammer home the idea that their results will be driven by the mix/pricing when we very clearly see a significant impact of volumes. The consequence is that the market understands that they are indeed closer to a Mercedes on their major indicators than to a Ferrari. So there was a “derating” (a deterioration of stock market multiples, Editor’s note), bringing them more towards the valuation of Mercedes”, summarizes an analyst.

HSBC, which purchased the automobile group in December, nevertheless considers these market fears about pricing to be exaggerated. The bank estimates that margins bottomed out in the third quarter, and that “robust product dynamics” should support its pricing. Notably, the group began delivering its new Cayenne, a luxury SUV, in the third quarter of 2023. Deutsche Bank is on the same page, saying the company “does not get enough credit” for its decisions intended to protect its prices, such as the reallocation of its sales to regions other than China.

Porsche, is it really luxury?

The question clearly arises of the classification of Porsche as a luxury group and therefore of its valuation. Many analysts consider that Ferrari has a model close to Hermès, with a culture of rarity. But it is much less obvious for Porsche, which still sells 320,000 cars per year (in 2023), compared to 13,663 units for Ferrari.

The difficulties experienced by the group in China also show that it is not immune to the economic situation, while Ferrari saw its revenues jump by 17% in 2023 and its profit by 34%, the Italian group driving its growth from prices but also in the customization (personalization) of vehicles sold to its customers.

“Porsche is becoming a cyclical stock that depends on the model cycle, which is the opposite of what we expect from a luxury company,” Daniel Roeska, an analyst at Bernstein, told Bloomberg.

This is not to say that Porsche is not a renowned brand. But it does not necessarily compare with Ferrari.

“Porsche AG does not have the ‘scarcity factor’ at group level to merit inclusion in the luxury industry. Unlike cars produced in limited series, such as those presented this year for the double anniversary (75 years of the group and 60 years of its flagship product, the 911), Porsche sells mass-produced high-end cars, whose price elasticity is de facto higher,” AlphaValue pointed out in October.

“Thus, the 911, the only model whose starting price is higher than 100,000 euros and which serves as the basis for most limited editions, only represented 13% units sold in 2022,” added the design office. .

AlphaValue’s conclusion: Porsche has yet to demonstrate its “luxury” side, that is to say “the one capable of surviving an economic downturn”.

Still, given the recent fall in the stock, the group’s valuation may seem attractive. Deutsche Bank advises the stock to buy as does HSBC. The Sino-British bank judged in December that the action could, certainly, experience a somewhat bumpy ride. But the stock has great potential “given the recent negative sentiment and the correction in the share price,” she added.

UBS also judges that “the valuation does not seem demanding for a luxury automobile company either.” It is now critical that management execute on product launches and regain investor confidence that has been damaged over the past two quarters due to execution issues and China weakness. Switzerland. “We remain buyers of the stock, while emphasizing that patience will be required as Porsche navigates the coming quarters with model changes,” he warns.