As auto enthusiasts everywhere know, a Porsche can turn heads like few other sports cars, a principle that seems to hold true for its shares.

The shares trade under the name of Dr ING F Porsche AG (P911:ETR), which is a mouthful, so we’ll refer to the company as Porsche AG, but interested readers should take note when it comes to searching for the stock on your chosen investment platform.

Porsche AG is the sports car maker and not to be confused with Porsche SE (PAH3:ETR), an investment company which owns 25% plus one share in Porsche AG and the majority of Volkswagen AG (VOW:FRA), itself an investor in Audi, Seat, Skoda and Porsche AG among others.

The structure is complex. Porsche AG stock was split into 50% voting ordinary shares – all controlled by the Piëch and Porsche families that founded the original company – and 50% into non-voting preferred shares. In simple terms, a quarter of the non-voting preferred stock were listed at the IPO (initial public offering) which took place on 29 September 2022, so 12.5% of the total share capital.

The timing of the IPO looked odd. Back then, global stock markets were lodged in a seemingly never-ending slump. IPOs in the UK and Europe were (and still are) thin on the ground with relatively small amounts of fresh growth funding being raised. But not Porsche AG.

According to Bloomberg, the company attracted so much demand that almost half of the investors who put in orders were not allocated shares, demand that helped price the shares at the top of the initial pricing range at €82.50, meaning around €19.5 billion was raised for parent Volkswagen and handing Porsche AG a €78.5 billion market value. That made the Porsche AG the largest ever IPO undertaken in Europe by valuation.

Since then, the stock has gone ever higher. Within six weeks of the Frankfurt debut, Porsche AG shares had topped €100 and they traded at €114.20 at the time of writing.

PORSCHE AG INVESTMENT CASE

There have been countless classic Porsche models over the years, starting with the 356 Roadster in 1948, the forerunner to the iconic 911, by far its most successful and famous car.

These days, Porsche makes SUVs (sports utility vehicles) and sedans alongside its high-performance sports cars, including the 911, 718 Boxster/Cayman, Panamera, Macan, Cayenne and Taycan, and its typically wealthy customers can be found in all corners of the world, from North America to China, Australia to Russia.

Like everyone else in the automotive industry, Porsche AG is facing stiff headwinds, including sky-high inflation, supply chain chaos and much else. Yet a Porsche is an aspirational status symbol, one that seeds demand years into the future while also enjoying loyalty among buyers that mainstream car makers would envy.

‘We expect mid-single-digit price increases to benefit from the group’s still-stable order bank, at a record of more than one year for the 911 and up to six months on its four-door models,’ said Berenberg analysts in March 2023.

In this regard, Porsche sits more comfortably along marques like Ferrari (RACE:BIT) than relative volumes makers like BMW (BMW:ETR) or Ford (F:NYSE).

EMBRACING ELECTRIFICATION

As with most forward-looking car manufacturers, Porsche AG has recognised the importance of embracing electrification, as set out in the company’s ‘Porsche Strategy 2030’ initiative. It said: ‘In 2021, 39% of our new cars delivered to customers in Europe were electrified, either as hybrids or with an all-electric drive. Globally, it was almost 25%. We intend to increase this to over 80% by 2030.’

This transition will need to be carefully managed so that Porsche AG can maintain its industry-leading profit margins while also keeping its heritage, a unique selling point against competitors.

Gross margins were 28.5% over the past 12 months, 10 percentage points above the industry average, while operating profit margins of 19.2% are three times that of industry averages. For reference, Tesla’s (TSLA:NASDAQ) most recent gross margins were around 19%, albeit impacted by its swathe of price cuts on various models to stimulate demand.

‘We view Porsche achieving a sustainable return on invested capital in the high-20% level after capturing momentum from its electrification efforts,’ says Berenberg.

ARE THE SHARES WORTH BUYING?

‘We believe Porsche offers unique exposure to the luxury automotive segment, enjoying strong pricing power, allowing the firm to face challenges such as: a) higher inflation costs, b) electric vehicle transition, and c) autonomous driving,’ said JPMorgan analyst Jose Asumendi. He noted that Porsche’s key product launches include the electric Macan in 2024 as well as a larger electric SUV in the medium term.

In short, Porsche AG is an aspirational heritage brand with iconic models that lead to customer loyalty. This means industry-leading margins that give it financial flexibility and a powerful free cash flow engine – free cash flow margins are forecast at 11.8% in 2024 and 13.5% in 2025. Yet the shares continue to trade at a wide discount to peers, about 60% lower than Ferrari.

Get its electrification transition right, this discount could narrow significantly over time and drive the share price to new heights. We rate Porsche AG as a ‘buy’.

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