Porsche Rated “Hold” by Stifel

Porsche Automobil Holding SE, a significant shareholder in both Volkswagen and Porsche AG, has received a downgrade from analysts at Stifel, changing its rating from Buy to Hold. This decision reflects shifts in Porsche Automobil’s investment outlook, primarily due to decreased dividend inflows from Volkswagen and limited opportunities for near-term debt reduction.

The analysts pointed to growing worries regarding Volkswagen’s financial prospects, governance issues at Porsche Automobil, and the ongoing complexities within its investment portfolio as the main reasons for the downgrade. Central to this reevaluation are adjustments to estimates for Volkswagen’s earnings per share (EPS) and its dividend payout ratio.

The revised forecast indicates that Porsche Automobil’s dividend income from Volkswagen might decrease by approximately EUR 500 million annually, largely due to Volkswagen facing significant challenges, including union pressures, weak free cash flow projections, and a precarious economic environment. As a result, Volkswagen may be inclined to cut dividends as it attempts to balance shareholder returns with labor concerns, including potential factory closures and workforce reductions.

Volkswagen’s free cash flow forecast for 2024 has been lowered from EUR 10.7 billion in 2023 to only EUR 2 billion, complicating its financial landscape further. Consequently, Stifel predicts that Volkswagen’s dividend payments could drop by 30% in 2024 and by 25% in 2025 compared to previous expectations. While this may be less critical for Volkswagen itself, it poses significant implications for Porsche Automobil, which relies heavily on these dividends to manage its debt and operational funding.

This impending cut in dividend income presents a considerable setback for Porsche Automobil’s debt reduction strategy. Initially, Stifel held a positive outlook on the company based on the expectation that Volkswagen would generate robust cash flows, enabling Porsche Automobil to decrease its debt over time. However, with diminished dividend prospects, Porsche Automobil’s ability to reduce leverage has become increasingly constrained, thereby providing fewer incentives for investors to favor Porsche Automobil over direct investments in Volkswagen or Porsche AG. As a result, Stifel has adjusted the long-term holding discount for Porsche Automobil from 32%, lowering the target price from EUR 69 to EUR 45.

Additional financial concerns stem from longstanding governance issues within Porsche Automobil. The supervisory board is predominantly composed of family members from the Porsche and Piech families, raising doubts about the independence and effectiveness of management oversight. Stifel noted that seven of the ten supervisory board members are either family members or close advisors, complicating the governance structure.

The overlapping leadership roles among Volkswagen, Porsche AG, and Porsche Automobil, while providing industry expertise, also challenge independent governance. Wolfgang Porsche’s recent contract renewal as a supervisory board member at Volkswagen, despite exceeding the maximum age limit for board members, suggests an unwillingness to change leadership dynamics within Porsche Automobil.

Hans Dieter Pötsch, one of the longest-serving executives in the German automotive sector, has led a company that has underperformed the broader automotive index significantly during his tenure, as highlighted by Stifel. These governance issues, combined with Porsche Automobil’s historically weak share price performance and a lack of structural reform, indicate minimal immediate pressure for a management strategy overhaul.

Furthermore, Porsche Automobil’s investment portfolio has become increasingly complex. In addition to its core stakes in Volkswagen (31.9%) and Porsche AG (12.5%), Porsche Automobil has invested in around 20 smaller firms, including a recent stake in a German drone manufacturer. While diversification may present long-term value, the market generally applies a discount to conglomerates with intricate portfolios, as investors favor clarity over complexity. Stifel argues that this increasing portfolio complexity could raise the holding discount for Porsche Automobil, further restricting its potential for growth.

Despite these challenges, there is an upside risk for Porsche Automobil’s stock. Currently trading at approximately 2.5 times estimated 2023 earnings, Porsche Automobil represents significant value if the Porsche/Piech family were to consider merging Porsche Automobil with Volkswagen. Such a merger could eliminate the holding discount but would likely diminish the family’s influence, making it an unlikely scenario in the near future. Wolfgang Porsche’s renewed contract with Volkswagen further suggests that no substantial structural changes are anticipated shortly.