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In this video we go over the relative valuations of Porsche AG, Porsche SE, and Volkswagen AG.
Check out our previous video about Adolf Merkle: https://www.youtube.com/watch?v=vesGjdMzMs4&ab_channel=WallStreetMillennial
0:00 - 3:34 Intro
3:35 - 10:20 Porsche-VE history
10:21 - 17:33 Is Porsche SE undervalued?
17:34 Volkswagen bull case
Email us: Wallstreetmillennial @gmail.com
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In this video we go over the relative valuations of Porsche AG, Porsche SE, and Volkswagen AG.
Check out our previous video about Adolf Merkle: https://www.youtube.com/watch?v=vesGjdMzMs4&ab_channel=WallStreetMillennial
0:00 - 3:34 Intro
3:35 - 10:20 Porsche-VE history
10:21 - 17:33 Is Porsche SE undervalued?
17:34 Volkswagen bull case
Email us: Wallstreetmillennial @gmail.com
Support us on Patreon: https://www.patreon.com/WallStreetMillennial?fan_landing=true
Check out our new podcast on Spotify: https://open.spotify.com/show/4UZL13dUPYW1s4XtvHcEwt?si=08579cc0424d4999&nd=1
All materials in these videos are used for educational purposes and fall within the guidelines of fair use. No copyright infringement intended. If you are or represent the copyright owner of materials used in this video and have a problem with the use of said material, please send me an email, wallstreetmillennial.com, and we can sort it out.
#Wallstreetmillennial
––––––––––––––––––––––––––––––
Buddha by Kontekst https://soundcloud.com/kontekstmusic
Creative Commons — Attribution-ShareAlike 3.0 Unported — CC BY-SA 3.0
Free Download / Stream: http://bit.ly/2Pe7mBN
Music promoted by Audio Library https://youtu.be/b6jK2t3lcRs
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Foreign selling over 8 million cars per year and generating over 300 billion dollars in annual revenue, the Volkswagen group is the largest automobile maker in the world. In addition to your namesake Volkswagen brand, they also own Skoda, C Audi Lamborghini Bugatti Porsche as well as the truck Brands Man, Scania and Navistar. They are also one of the largest Ev makers in the world, having sold 572 000 battery electric vehicles in 2022. That puts them only behind Tesla and two Chinese automakers Byd and Siac.
Despite owning some of the most valuable brands in the world and being one of the leaders in electric vehicles, the company's stock has been a major loser over the past few years and its price to earnings ratio of 4 puts it comfortably in deep value territory. In 2021, the chief valuation caught the attention of The Big Short investor Michael Barry On Twitter He said that he doesn't own a Porsche car, but he does own the Porsche that owns VW that owns Porsche. So what is he talking about? There three publicly traded companies relating to the Volkswagen Empire Volkswagen AG Porsche Ag and Porsche SE Porsche SE only has 38 employees and it doesn't make any cars. It is a holding company with the sole purpose of investing money on behalf of the Porsche family.
Porsche SE owns a 31.9 stake in Volkswagen Ag and the majority of the voting shares. This gives it complete control over Volkswagen. It also owns a 12.5 stake in Porsche AG. The company that actually makes the Porsche cars Volkswagen AG own 75 percent of Porsche AG, giving it complete voting control.
Thus, Porsche SC indirectly owns 36 percent of Porsche AG as well as the 31.9 percent of Volkswagen's other assets. They also have complete voting control over both companies. Michael Bree was bullish on Volkswagen's business prospects, but instead of buying shares in Volkswagen AG directly, he bought shares in the holding company Porsche SE. And that's because Porsche SC stock appears to be extremely undervalued.
As of April 24, 2023, One share of Porsche AG costs 115. Euros If you buy shares of Porsche SE or Volkswagen AG, you are indirectly purchasing shares of Porsche AG. If you buy 89 Euros worth of Volkswagen shares, you would indirectly own one share of Porsche AG plus all of Volkswagen's other assets for free. If you buy 70 euros worth of Porsche SE shares, you would indirectly own one share of Porsche AG plus their share of Volkswagen's other assets plus a few other assets that they own for free.
This is quite a strange situation. It's like if you went to a store and they were selling iPhones for one thousand dollars each, but they sold the exact same iPhone with the free iPad and Mac thrown in for free. and this whole package only costs six hundred dollars. Even if you think the iPad and Mac are worthless, you're still better off buying the package and throwing away everything else besides the iPhone.
That's basically what we have with the Volkswagen Porsche situation. On the surface, it looks like Porsche SE is an obvious buy given its undervaluation compared to Porsche AG. However, the situation is a lot more complicated than the hypothetical example of the iPhone and the bundle. To understand what's going on, we have to understand the history between Porsche and Volkswagen and the Arcane shareholding structure between them. In this video, we'll find out why the Porsche SE holding company exists, why it trades at such a discount, and whether or not this represents an opportunity for investors. Porsche was co-founded by the German engineer Ferdinand Porsche in 1931. the company was a design firm Other automakers would pay them to help them design a new car. In the beginning, Porsche didn't make any cars under their own name in 1934 Adolf Hitler founded the Volkswagen company with the goal of producing an affordable automobile for the German people.
The Nazi government hired Porsche to design the Volkswagen Beetle, but the plant and mass-produced the cars was cut short with the outbreak of the Second World War. Volkswagen transitioned to making tens of thousands of light military vehicles. Ferdinand Porsche who was a personal friend of Adolf Hitler started making tracked military vehicles, including a massive tank destroyer, which was called the Ferdinand. After the war, Ferdinand was arrested for war crimes, but was released about two years later.
After his release, Ferdinand went back to designing cars, culminating with the iconic Porsche 911 sports car, which became a huge success following the war. Volkswagen went back on his original Mission of mass-producing affordable Beetle cars. The company was owned by the government of lower Saxony the province of Germany where it is based in 1961 the iPod on the Frankfurt stock exchange, with the government of Lower Saxony maintaining a 20 stake over the next 50 years, the two companies developed independently by focusing on affordable, mass-market cars. Volkswagen became one of the biggest automakers in the world Porsche also ipo'd in 1974, but the Porsche family continued to wholly controlling stake.
While it was much smaller than Volkswagen in terms of the number of vehicles sold, the high prices of their sports cars made them extremely profitable. Despite portion Volkswagen being separate companies, they've always had a very close relationship with poor sourcing many of its parts from Volkswagen. For example, the Porsche Cayenne SUV uses the same chassis as a Volkswagen Touareg By the mid-2000s Volkswagen had become a behemoth, having acquired numerous other brands including Adui, Skoda, and Lamborghini just to name a few. A lot of investors believe the company would be worth more if it were broken up and each of their brands operating as an independent company.
By 2007, there is Media speculation that a Consortium of hedge funds might try a hostile takeover of Volkswagen and do exactly that. At the time, Porsche was controlled by Wolfgang Porsche the grandson of founder Ferdinand Porsche. He didn't want Volkswagen to be broken up as this could potentially jeopardize the technical relationship between the two companies. In March of 2007, Porsche acquired a 31 stake in Volkswagen the government of Lower Saxony still owned 20. They would presumably also be against selling Volkswagen to the hedge funds as this could result in layoffs of factory workers. With Porsche and the government of Lower Saxony owning a combined 51 stake, a hostile takeover from hedge funds became impossible. This was Porsche's stated rationale. A spokesperson from the company explicitly said that they do not have any intention of taking over the company.
Volkswagen has two classes of stock: common shares and preference shares. The two shares represent identical economic ownership of the company. The only difference is the common shares have voting rights and the preference shares do not. Porsche was buying the voting shares because of all the buying pressure from Porsche the value of the voting shares increasing significantly above the value of the preference shares.
A lot of hedge funds and other large investors started to take note of this price discrepancy. So, two shares have identical economic rights. Buying the undervalued preference shares and selling short the overvalued voting shares seemed like a slam dunk investment. One of the investors making this trade was a German billionaire named Adolf Merkel.
However, in October of 2008, Porsche changed its mind. They made a surprise announcement that they had increased their stake in Volkswagen to 74 percent through a combination of stock and options. Remember that the government of lower Saxony owned 20 and they had no intention of selling. This left only six percent of shares as the free float of that passive index funds also owned a few percent, so less than two percent of the stock was freely available.
The short sellers panicked and rushed to buy the stock to cover their positions, catalyzing a mother of all short squeezes. The stock price increased more than 300 in one day, making Volkswagen technically the most valuable company in the world. During this same period, Volkswagen's non-voting preference shares were tanking as the 2008 Great Recession was hitting vehicle demand thanks to urgent share price Porsche made a 6.8 billion Euro gain on their call options. This game came at the expense of the short sellers who were forced to cover at astronomical prices.
Porsche's CEO and CFO were charged with Market manipulation. Prosecutors allege that Porsche intentionally misled the market to catalyze a short squeeze. Both men were eventually acquitted. With technical questions of legality aside, the short squeeze undoubtedly caused severe harm to the short seller. The German former billionaire Adolf Merkel lost nearly all of his remaining Fortune when he was forced to cover his Volkswagen short at the highs. Unable to face the humiliation of losing everything, he jumped in front of a train, leaving behind his wife and four kids. If you want to learn more about Adolf Merkel's tragic story, check out this video he made about him. Link In the description below display all the hype.
Porsche was not able to follow through on his plans to acquire Volkswagen They had accumulated close to 10 billion dollars worth of debt to build up their Volkswagen stake in order to consolidate Volkswagen's balance sheet and get access to a larger company's cash. they need to own 75 percent. They own 74 including their call options, but they didn't have enough cash to execute these options for the next four years. The merger was stuck in limbo.
Both companies continued to operate independently. In the Volkswagen voting shares continue to trade at a significant premium to the non-voting preference shares. In 2012, they finally came up with a solution. Instead of Porsche acquiring Volkswagen Volkswagen acquired Porsche Instead of Volkswagen buying the entire Porsche group, they only bought the operating company Porsche AG Porsche AG owns all the factories intellectual property Etc The holding company Porsche SE owned Porsche AG as well as some other assets.
most notably a 31 stake in Volkswagen Volkswagen acquired just the holding company Porsche SE continued to be a publicly traded company, but it doesn't have any operating assets. It's basically a shell company whose only purpose is to hold Volkswagen chairs. while Porsche SE only holds a 31 stake in Volkswagen. half of Volkswagen Shares are preference shares with no voting rights.
Because Porsche owns the voting shares, they hold 62 percent of the Voting Rights giving the Porsche family complete control over Volkswagen. So in the end, they effectively achieved their goal of buying Volkswagen albeit in a convoluted way. Foreign to 2021, many of Volkswagen shareholders were growing increasingly frustrated by the company's low stock price. Despite the company making significant gains in terms of electric vehicle sales, the stock continued to languish with a single digit price earnings ratio.
There were two potential reasons for this: Volkswagen owns 10 different car brands and four different truck Brands and is widely Diversified across geographies and customer segments. This alone could hurt the valuation. For example, some people may want to invest in a truck Builder but they're not interested in investing in passenger cars. others may want to invest in a luxury car maker and they're not interested in mass-market cars.
The diversity of Volkswagen's business may make them less appealing to narrow-minded investors. Another potential reason for the low valuation may be the Dieselgate Scandal in 2015. The U.S Environmental Protection Agency found that Volkswagen created software that could detect when cars were being tested for emissions and activate controls to reduce emissions levels. This allowed Volkswagen cars to gain regulatory approval despite emitting up to 40 times the legal limit of nitrogen oxide, a gas that can cause respiratory problems and acid rain in 2016. VW Settled the case with the U.S Justice Department agreeing to pay 10 billion dollars to compensate consumers, as well as 5 billion dollars to help mitigate pollution. While this is a shocking sum of money, it doesn't completely resolve the issue. Just this past year, Volkswagen paid 193 million pounds to settle cases brought against it in England and Wales. While the U.S represented the vast majority of the liability, faulty cars were sold in many other jurisdictions as well.
Currently Volkswagen has 1.4 billion Euros set aside on their balance sheet to cover potential future diesel gate liabilities, but the amount they have to pay to settle future lawsuits could differ materially from this. If investors are paranoid about the potential for future liabilities, this may prevent them from buying shares in Volkswagen. So in September of 2022, Volkswagen made the decision to IPO Porsche AG on the Frankfurt Stock Exchange Volkswagen sold 25 of Porsche AG's shares. 12.5 were bought by Porsche SE and the remaining 12.5 were sold to the general public.
Volkswagen still owns 75 of Porsche Ag and thus retains complete control over it. Nothing operationally changed out the company. It was purely a financial engineering exercise in an attempt to gain a higher valuation. The idea was that Porsche AG would have a higher valuation as a standalone company because it can cater towards a more narrow set of investors and it is unencumbered by the threat of future dieselgate liabilities.
And this is exactly what happened since the IPO Porsche AG stock price has increased while Volkswagen stock price has been flat and Porsche SC stock price has inexplicably decreased. Currently, Porsche SE stock prices: roughly 60 of the value of the Porsche AG shares that it owns. This is even adjusting for Porsche Sc's net debt. Thus, by buying a share of Porsche E, you're basically buying shares of Porsche AG for 60 cents on the Dollar Plus getting all their other assets for free.
Does this mean that Porsche SE is undervalued? Not necessarily. First, all of Porsche AG is probably overvalued. Being cheaper than an overvalued stock doesn't necessarily make you undervalued. Porsche is split up into two share classes: common shares with voting rights and preference shares with no voting rights.
The common Shares are all owned by either Volkswagen AG or Porsche SE. None of them are available to the general public. Of the non-voting shares, 75 percent are owned by Volkswagen. So, the free float available to the general public is only 12 and a half percent of Porsche AG's total shares. Outstanding. Porsche AG has a large market cap, but a very small free flow. Many passive investors follow market cap based indices, so they automatically buy a large number of poor shares just because a Sparky cap is vague. For example, the company's largest outside shareholder is the Norwegian Sovereign wealth fund Norgis Bank, which is passively managed.
Because of the low free flow, the stock can easily be pumped up to very high levels, and while this is hard to quantify, there are probably a lot of wealthy Porsche owners who just buy the stock because they think the car is cool. As of the time of recording this video, Porsche's stock trades for 26 times last year's earnings, which is a very expensive valuation for an automobile manufacturer. A more interesting comparison to make is Porsche SC versus Volkswagen Porsche SC trades at a significant discount to its stake in Volkswagen. Unlike Porsche AG Volkswagen has a very large free flow and its valuation of four times, last year's earnings is far more reasonable to say the least.
So what can explain the undervaluation of Porsche Se's shares relative to Volkswagen Porsche SC is not the only holding company which trades at a discount to its net asset value. A South African company called Naspers bought a stake in the Chinese Internet Giant Tencent in the early days. This stake eventually grew to be worth more than 100 billion dollars and the 10 cent stake became worth more than Nasper's entire market cap. This gained the attention of value investors who thought that this made Nasper's stock undervalued.
However, the valuation discount never closed, so the bull case never played out. It's a similar story with the Japanese these media and Technology Giant. SoftBank In 2000, they invested in a little-known Chinese startup called Alibaba. This investment eventually came to be worth 200 billion dollars, well in excess of Softbank's own market cap.
Similar to Naspers soft Thanks valuation discount never closed and the bull case never played out. In both cases, the discounted net asset value has been stubbornly persistent because Naspers and SoftBank shareholders have no way to access the Tencent or Alibaba shares of these respective companies own. If Naspers and SoftBank don't sell their Stakes, the shares will just sit on their books doing nothing and there is no way for shareholders to directly benefit. However, Porsche SC situation is very different.
Unlike Tencent, and Alibaba Volkswagen pays a significant dividend. They cut the dividend in 2016 to build up cash for their Dieselgate liabilities, but other than that, they've been consistently increasing the dividend. They also use their proceeds from the Porsche AG IPO to pay a massive special dividend in early 2023, but even the ordinary dividend currently offers a seven percent yield. Porsche SE takes roughly 90 of the dividend account that receives from Volkswagen and pays it out as a dividend to its own shareholders. For long-term oriented shareholders, it doesn't matter if the discount to Nav never closes. In fact, it's actually a good thing if Porsche's stock remains cheap, because this means you can reinvest your dividends at a higher yield. This is the key difference between Porsche SC and the other holding companies like Naspers and SoftBank. They use the remaining 10 of dividend income to make investments into early stage Tech startups.
Although their track record isn't exactly great. of all their Investments, so far, only one of them has gone public, a Lidar company called Aeva Technologies since merging with a spec in 2020. It has lost 90 percent of its value and looks to be on the brink of bankruptcy. But even if you assume that all of their startup Investments are worth nothing, Porsche's stake in Volkswagen alone is worth more than their entire market cap.
So Porsche SC is undervalued compared to its Volkswagen stake. Not only that, but Volkswagen itself may be undervalued in its own right. Foreign: Volkswagen made about 15 billion Euros of net income attributable to Common Shareholders Of this, about 75 percent of it came from selling automobiles. The remaining 25 came from their Financial Services Unit which provides financing for the purchase of Volkswagen cars.
If we apply a 10 times price to earnings multiple on the automobile business which is the same multiple Toyota has, we get 112 billion euros of value. for the financial services piece, we apply a lower six times multiple. This is the multiple of Allied Financial a bank which focuses primarily on automobile lending. This gets us a total value of 135 billion euros or 264 Euros per share.
We then have to make an adjustment for a 26 German dividend withholding tax. The value of a stock is the value of its future dividends. Because the future dividends will all be subject to withholding tax, we deduct 26 from the value to get 195 Euros per share. Currently Volkswagen's non-voting preference shares trade for 122 Euros per share giving 60 upside.
Based on these calculations, the valuation is even more attractive for Porsche SE Based on the Fair Value Estimate we made for Volkswagen their 31.9 stake in the automaker is worth 43 billion euros at current market price. Their 12 and a half percent stake in Porsche AG is worth a little over 12 billion euros. However, as we discussed previously, Porsche AG is probably overvalued if we assign a 10 times earning multiple on Porsche AG The stock is worth 5 billion euros. Porsche SE also has about 7 billion euros of debt.
Even if we assume their portfolio of early stage startups is worthless. This gives them a net asset value of 134 Euros per share. Porsche is a German company. So just like Volkswagen we have to deduct the 26 dividend tax. This yields a fair value of 99 Euros per share, which is almost double the current stock price. For full disclosure: I own shares of Porsche SE and this video is not Financial Advice: Another option would be to buy a cheap Porsche SE shares and shortly relatively overvalued Porsche AG chairs. However, I personally would not do this. Given the low free flow of Porsche AG the stock could become vulnerable to a short squeeze.
and as we saw in 2008, short squeezes can have catastrophic consequences for short sellers. All right guys, that wraps it up for this video. what do you think about Volkswagen and Porsche Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.
but dividends from germany pay tax in germany and in your country, so more than 50% is taxes
It's not the same as getting a free iPad with your phone, you can't just throw away the other parts, and they could also become liabilities potentially
Nobody remembers DieselGate, not even the governments, Canada just gave them CAD$14b to build a battery plant
It is pronounced Porsch e
You don't have to deduct 26% KapEStG – see Sec. 8(b) KStG. 1.5% WH tax only for I/C dividends.
But that just makes your point stronger.
thank you very much, such a great analysis in really short time, but i would advice you to make separate videos for those like me who would like to understand deeply and get more knowledge of yours.
I'm your faithful subscriber and will always be.
great job great content great content creator
Which company is the correct one to buy?
Mispronounced seat
Yo; it's PORSCHEEEEEEE …….NOT PORSCH!
It amazxes me that a man who made $12 billion could lose it all in one trade.
I have a headache now….
Ever consider the low valuation is because deep down everyone knows electric vehicles are a stupid idea relying on state subsidies that will end in tears when the money runs out?
You might want to consider using a de-esser plugin to control sibilance and get rid of those sharp artifacts in your audio.
Pawshuh. Dang Yankees hehe
I mean damn, Volkswagen was founded by Hitler and Porsche was his best friend.
You didn’t mention how the 20% government share is a controlling share. By law the government can block all decisions with their 20% share.
What about the 7bn debt on their balance sheet that magically appeared last year?
I've actually held this for a while. I'm down on the position so it's just sitting in the filing cabinet
Thanks for making the video.😀
I read Porsche AG's IPO prospectus. After a long period head scratching, I couldn't make up my mind about the convoluted ownership between Porsche SE, VW AG, Porsche AG, and Porsche GmbH. (The last one is essentially an LLC wholely owned by VW AG for the purpose of holding shares in Porsche AG.) That's before we get to common (voting) vs preferred (non-voting) share classes. The only thing I can think of is that Porsche and Piech families must be a control freak. Which is probably true.
While I agree with your analysis that VW AG and Porsche SE shares are undervalued, I take issues with the control or rather the lack thereof. How else could dieselgate came about? There are many recent examples of how egomaniac majority-vote-owning shareholders wrecked the company by refusing to listen to anyone else.
I hope VW will engage in genuine reform after dieselgate. After a period of cover-ups, there are signs that's happening. They just have the first ever female on board. Think about that.
So basically VW is a classic example of a valuation trap?
If you want to throw money away you invest in one of these stocks. VW is going bankrupt, Porsche will go down with it.
The Hitler connection might be an issue. I won't own a Volkswagen or anything the own. The name shouldn't exist and they are two stupid to change it.
So there's a bit of a misunderstanding of what Porsche AG is. It is not technically a car manufacturer, it is an automotive engineering consulting company that reserves the right to build all designs under it's own brand if the client backs out. They've built cars for Mercedes, VW, Audi, Toyota, and probably a lot more. And until the Byzantine co-ownership structure with VW evolved, the only long running model in their lineup was the 911. Obviously, since this Porsche/VW relationship has become very tight, they've effectively become a car manufacturer.
Also, it was incredibly painful to hear one of the top 3 names in motoring mispronounced so many times.
Seat = Say-at. Porsche pronounces the e at the end.