Porsche's Product Overhaul: A Bumpy Road to Profitability

Porsche Automobil Holding SE (Porsche SE) has withdrawn its profit forecast for the year, citing billions of dollars in writedowns tied to its investment in Volkswagen (VW) and its own sports-car-maker Porsche AG. The holding company, which owns 53.3% of VW, is now expecting a significantly negative impact on after-tax profit due to impairment losses related to its investments in the two companies.

Porsche SE's management board estimated the impairment charges after VW informed the holding company that its and Porsche AG's current planning isn't expected to be done by Dec. 31. This delay prevents Porsche SE from relying on the results of their current approved plan for accounting purposes. The impairment charges are estimated to be between 7 billion euros and 20 billion euros for VW and between 1 billion euros and 2 billion euros for Porsche AG.

The impairment charges are tied to several factors, including an uncertain market environment, lower demand than originally expected in various markets, and increasing geopolitical tensions and protectionist tendencies. VW, in particular, is battling a tough economic environment as it faces tepid demand for electric vehicles (EVs) and increasingly fierce competition from lower-cost Chinese EV makers. The company is also contending with a costly domestic manufacturing footprint that hinders its competitiveness.

Porsche SE previously had expected after-tax profit between 2.4 billion euros and 4.4 billion euros for the year. Despite the impairment charges, Porsche SE confirmed its forecast for the net debt as of the end of the year between 5 billion euros and 5.5 billion euros.

Porsche AG, the sports car manufacturer owned by Porsche SE, is also facing challenges as it embarks on a year of product launches. The company is renewing four out of its six model lines in 2024, which is expected to have a significant impact on its competitive position in the global luxury car market. However, the comprehensive upgrade of the product portfolio is associated with a great deal of effort and demands a lot from the entire Porsche team. The initiated renewal of the model range caused a strong aperiodic increase in research and development costs and marketing activities in the first quarter of 2024.

The two ramp-ups in the first three months also had an impact on inventories and sales. Porsche AG's management is staying on course and resolutely pursuing its strategy, but the challenging environment is expected to lead to a decline in sales and earnings in the first three months. At the end of the first quarter, Porsche AG recorded a group sales revenue of 9.01 billion euros (previous year: 10.10 billion euros) and a group operating profit of 1.28 billion euros (previous year: 1.84 billion euros). The group operating return on sales was 14.2% (previous year: 18.2%).

Despite the challenges, Porsche AG is sticking to its forecast for the full year 2024, provided that the macroeconomic environment does not worsen significantly. The company is expected to generate a group operating return on sales of 15 to 17 percent.

In conclusion, Porsche SE's withdrawal of its profit forecast and the estimated impairment charges highlight the challenges faced by the holding company and its investments in VW and Porsche AG. The strategic product overhaul at Porsche AG is expected to have a significant impact on the company's competitive position in the global luxury car market, but the comprehensive upgrade of the product portfolio is associated with a great deal of effort and demands a lot from the entire Porsche team. The market environment, geopolitical tensions, and increasing competition are all factors that investors should consider when evaluating the risk-reward profile of Porsche SE's investment in VW and Porsche AG.