Volkswagen and Porsche are stuck in Wall Street's pits. Stock investors, start your engines.

By Andrew Dickson

Large stakes in two undervalued German carmakers have put a wrench in the shares of holding company Porsche SE

I am going to try to make this as uncomplicated as possible. This story is not about Volkswagen; it's about Porsche Automobil Holding SE - but VW is a critical piece of the puzzle.

Volkswagen (XE:VOW), the automotive giant, owns many brands including luxury marks Bentley, Bugatti, Audi and Lamborghini, and more affordable ones such as Skoda and, of course, Volkswagen itself. Volkswagen also owns shares of its publicly traded trucking assets (Scania, Man, and Navistar) called Traton (XE:8TRA), and it also owns a stake of Porsche AG.

Now Porsche SE does not make Porsche automobiles. Porsches are made by Porsche AG, which has the (clever) German stock-exchange symbol P911 (XE:P911) (DRPRY).

Porsche SE is a holding company whose shares trade in Germany under the symbol PAH3 (XE:PAH3) (POAHY). Porsche SE mostly holds Volkswagen ordinary shares, but it also owns other assets including shares of carmaker Porsche AG.

In our view, Porsche SE's shares, with a recent 14 billion euro market cap, are one of the most underpriced, liquid, listed assets available to investors.

The big question is if Mr. Market is making a mistake. Most Wall Street analysts who follow Porsche SE aren't answering this. Those who are trying aren't doing proper work. This lack of motivation may be because a difference in the value of stakes and the market cap of individual companies isn't necessarily something that will get immediately rectified, so it isn't exciting enough to dive in. But for longer-term investors, Porsche SE is definitely worth a look.

Fast lane

We first need to start with VW. Volkswagen has ordinary shares and preference shares. These two can become disconnected (famously so in 2008), and in fact they recently traded about 15% apart.

We should also discuss the listings of Porsche AG and Traton, and why Volkswagen did them. Based on our analysis, these were value-enhancing moves. It isn't uncommon for specific brands to sit inside of larger automaking conglomerates and not be valued properly by investors. The king of recognizing this was Sergio Marchionne at what was then Fiat Chrysler (FCA) and is now called Stellantis. (STLA)

Marchionne was the maestro of shareholder value creation. The most impressive of the spins by FCA was Ferrari (RACE), which within a year of its listing had a larger market cap that Fiat Chrysler had itself, without any degradation of FCA's market cap, amazingly. Marchionne made a similar but smaller move with Fiat Industrials and CHNI, which produces agricultural trucks and heavy equipment under the International Harvester and Case brands. FCA shareholders, including our firm, were huge beneficiaries of all this, as was a holding company called Exor, the investing vehicle of the Agnelli family.

Volkswagen saw all the value creation at Fiat Chrysler, and eventually took a page out of Marchionne's book. Volkswagen owned majority stakes in truck brands Scania and MAN, and a smaller stake in Navistar. All these pieces were put into a single truck division, which was then spun out as "Traton" in the summer of 2019. Volkswagen now owns 89.7% of Traton, which recently sported a market cap of 16 billion euros - worth more than 14 billion euros to VW.

Kicking the tires

Then there is Porsche AG. The maker of 911s, Caymans, Panameras, Taycans, and Cayennes was listed in September 2022 (just as FCA did with Ferrari in 2015). The share capital of Porsche AG was divided (50/50) into non-voting preference shares and voting ordinary shares. Volkswagen retained 75% of the ordinary shares, as well as 75% of the preference shares. The remaining 25% of the preference shares in Porsche were publicly listed, while the remaining 25% of the ordinary shares went to Porsche SE.

Porsche AG recently had an overall market cap of more than 80 billion euros. VW's 75% ownership works out to a stake worth 60 billion euros.

Read: Porsche's stock climbs as luxury brand touts dividend hike, model launches

So, the Porsche AG and Traton stakes combined are worth 74 billion euros to Volkswagen. But the entire market cap for Volkswagen itself is only 62 billion euros. Volkswagen also has more than 40 billion euros of net industrial cash on hand.

Think about this. The implication is that the rest of Volkswagen's business has severely negative value. We don't believe this is the case at all. Not even close.

If Porsche and Traton are excluded from VW's financial statements, then the remaining Volkswagen group is still expected to generate more than 230 billion euros in sales and almost 12 billion euros of operating profits in 2024.

Assuming an enterprise-value (EV) to earnings-before-interest-and-taxes (EBIT) multiple of just 5x (or EV/Sales of approximately 0.2x), this specific stake (which excludes Porsche AG and Traton) would be worth 99 billion euros.

On that basis, Volkswagen should have a market valuation of roughly 173 billion euros -14 billion (Traton) + 60 billion (Porsche AG) + 99 billion (VW)- but it sits at 62 billion euros.

Up to speed

You might think that Volkswagen stock might be an interesting sum-of-the-parts play, but here's what's even more intriguing: Remember that Porsche SE owns Volkswagen ordinary shares. In fact, it owns 53.3% of Volkswagen ordinary shares. This represents a 31% interest in the whole of VW, but given that Porsche SE ownership is via the ordinary shares, it has a voting majority - and thus full control of VW.

For Porsche SE, Volkswagen at a value of 173 billion euros makes its 31% stake theoretically worth 54 billion euros. Porsche SE also owns 25% of the ordinary shares of Porsche AG, which represents 12.5% of the overall firm. Based on Porsche AG's recent share price, this stake alone is worth almost 10 billion euros.

So, after backing out some net debt, Porsche SE should have a market cap of 58 billion euros. Yet its market value is less than 15 billion euros.

Why does this gap exist? Years ago there was a battle between Porsche SE and VW, wherein Porsche SE attempted to take over VW. The net result was that Porsche SE indeed emerged as controlling owners of VW (despite media reports), but there was a big lawsuit over this and potential litigation liabilities hung over the stock back then. They still do.

Will German courts force Porsche SE to pay out billions of dollars to some U.S. hedge funds that lost money shorting one the country's largest (and proudest) employers? I think not. I didn't think 10 years ago that Porsche SE would have to settle anything; 10 years later I feel even more strongly that they won't.

Mr. Market hasn't realized all this about Porsche SE just yet, but it wouldn't be a surprise to see him get behind the wheel.

Andrew Dickson is chief investment officer at Albert Bridge Capital, manager of the Alpha Europe Fund. Follow him on X @albertbridgecap. Albert Bridge currently holds positions in Porsche SE and Traton.

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-Andrew Dickson

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03-16-24 1629ET

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