Probably the biggest event of the year is imminent on the stock exchange: the IPO of the sports car manufacturer Porsche. For now, investors can only buy shares in the holding company of the same name Porsche SE (WKN: PAH003) buy and acquire mainly indirectly Volkswagenshares (WKN: 766403). Investors should now have the opportunity to invest directly in the popular cult brand at the end of September.
At the time of the IPO, Porsche stock is expected to achieve a valuation of between 70 and 75 billion euros, making it a major player in the German stock market in one fell swoop. Even the Volkswagen stock has a market value of only 88 billion euros (as of September 19, 2022). Can it be justified?
Porsche shares and Volkswagen shares – a mispricing?
Porsche delivered just under 146,000 cars in the first half of 2022, dwarfing parent company Volkswagen, which sold around four million vehicles. When it comes to sales, the two automakers are worlds apart. So it seems nonsensical that Porsche stock should have almost the same valuation as Volkswagen stock after the IPO. Especially since the Wolfsburg-based company will still own 75% of the sports car manufacturer after the IPO.
After the Porsche IPO alone, this block of shares will be worth between 52.5 billion and 56.25 billion euros. That’s up to 64% of the market value of the Wolfsburg automaker. The rest of the business, which includes brands such as Audi, Lamborghini and Volkswagen itself, would be available for less than 32 billion euros.
Porsche IPO: The reason for the high valuation
But there are some differences in the financials of the two companies that make it clear why Porsche stock is poised for such a high market value.
The sports car manufacturer has tripled its sales in the past ten years. The brand coped well with the shortage of semiconductors because Porsche was prioritized in the group when it came to distributing chips. Unit sales fell by only 5% in the first half of the year. Volkswagen, on the other hand, sold 14% fewer cars in the first half of the year than in the same period last year and is well below its best times.
But the biggest difference lies in profitability. The return on the sale of Porsche shares should be between 17 and 18% for the full year 2022 – this is an absolute class value in the automotive industry. In the case of the Volkswagen Group, it will be single digits – and Porsche has a significant share in that.
At the end of 2022, a few months after the Porsche IPO, the profit transfer agreement between the sports car subsidiary and the parent company should also expire, so the profitability of Volkswagen shares will continue to fall from 2023.
A company’s profitability in relation to sales and the invested capital are decisive factors in the valuation of shares. Porsche stock is clearly ahead here, as the small-volume sale of luxury cars is simply more lucrative than the mass business that would remain with Volkswagen stock.
Volkswagen stock is currently valued at a price-to-earnings ratio (P/E) of just 4.4, which seems extremely cheap. Especially when you consider the value of the remaining stake in Porsche stock.
But the stock market is already pricing in a decline in earnings next year. Not only due to loss of profit agreement but also due to various other factors. Porsche is in a more solid financial position – and this rewards investors with the high rating of the Porsche IPO.
The article Porsche shares: This IPO price sounds unreasonable and overpriced appeared first on The Motley Fool Germany.
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Christoph Gössel owns none of the shares mentioned. The Motley Fool owns shares of and recommends PORSCHE AUTOMBL UNSP/ADR and Volkswagen AG.
Motley Fool Germany 2022