The Porsche family’s 400 million Euro insider transaction that you should take note of

The Porsche family’s 400 million Euro insider transaction that you should take note of
22 March 2019

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I love nothing more than large-scale insider purchases from parties that are extremely close to a public company.

When people with an inside view of a company are loading up on shares, there is usually something afoot. Insider purchases aren't an infallible indicator, but they give strong clues. All the more so when they amount to hundreds of millions of Euros.

In my 28 January 2019 report on Porsche SE/Volkswagen, I made a prediction that seemed pretty daring at the time.

Turns out, things are going exactly the way I expected them to!

Massive vote of confidence by Germany's no. 1 auto family

Porsche SE, the holding company controlled by the closely related Porsche and Piëch families, has increased its stake in Volkswagen.

It upped its stake from 52.2% of the voting rights to 53.1%.

This increase in Porsche SE's stake in Volkswagen is very significant when you consider that:

  • The Porsche/Piëch families don't just have extraordinary expertise in the auto industry in general. They also have the closest possible insight into Volkswagen, given that Porsche SE's CEO is also the Chairman of Volkswagen.
  • EUR 400m isn't exactly spare change. It's a significant amount of money in absolute terms, and it's about one-third of the cash reserves that Porsche SE had available. This is a very meaningful "insider purchase" if ever there was one.
  • Volkswagen's CEO followed suit by putting EUR 2m of his own money into Volkswagen shares, as insider disclosures showed this week.

As anyone who follows business news will remember, the Porsche/Piëch families had spent years mired in legal issues and family affairs. Their failed 2008/09 hostile take-over attempt at Volkswagen haunted them legally and financially; the family was at a point of having to manage the transition from the 3rd to the 4th generation; and Volkswagen itself struggled with the fall-out of "Dieselgate."

In my Porsche SE/Volkswagen report, I predicted that 2019 was going to see a notable change.

I expected the Porsche/Piëch families to go back to putting the pedal to the metal when it comes to Volkswagen. My report disagreed with those observers who said they were going to passively watch their Volkswagen investment from afar. On the contrary, I expected them to use 2019 to go on the offensive! And I predicted that this was going to be one of the great stories in 2019/2020 in the German auto industry.

Those who first wanted to see concrete proof for my theory now have EUR 400m worth of evidence to look at! Porsche SE is literally going "all in" when it comes to its Volkswagen investment.

Volkswagen is a goldmine waiting to be exploited

The CEO of Porsche SE summed up their rationale in a short statement:

"We are convinced that Volkswagen Group has considerable potential for increasing its value. That's why we decided to increase our stake in the company further."

The media are mostly still focused on the legal cases currently going on because of Dieselgate and the 2008/09 takeover battle. The SEC just added a (non-sensical) lawsuit to the mix. However, the Volkswagen share price didn't budge when this was announced. As I described in my report, these legal issues have all been priced into the valuation already. They are yesterday's news and unlikely to have all that much influence on the share price.

What counts going forward are primarily three factors:

  • How much cash is Volkswagen throwing off on an annual basis? How much of that is passed on to shareholders as a dividend?
  • Can Volkswagen achieve multi-billion Euro cost savings by finally cutting back its famously bloated operation?
  • What growth prospects do the different auto businesses have?

I had predicted that 2018 should yield Volkswagen a net profit of EUR 12bn. The actual figure, as released in early March, came out at EUR 12.2bn. In amidst all the media noise about Dieselgate and the general doom and gloom about auto manufacturers, VW continues to mint money!

Cost savings are a factor I had identified as being even more critical at this stage than the immediate growth prospects in the automobile business. Whether Volkswagen sells 2% more cars or 2% fewer cars in any given year pales in comparison to the additional money the company could earn if it finally tackled its bloated cost structure. Which is why I was delighted to read the mid-March news about Volkswagen planning to gradually cut 7,000 jobs, most of which are in administration. This will lead to annual cost savings of no less than EUR 5.9bn from 2023 onwards, and smaller amounts in the years leading up to it.

Recent media reports also confirmed that I was on the right path when predicting that Volkswagen was going to review its sprawling portfolio of (niche) brands. All of which ties into my overarching theory that the Porsche/Piëch families are now going to push for Volkswagen to become a leaner operation and one that is more attractive for investors. Which also explains their current desire to deploy additional hundreds of millions of Euros into Volkswagen shares.

For Porsche/VW shares, it could well be "Now or never"

Presumably, Porsche SE bought these additional Volkswagen shares in the open market. It's reasonable to guess that the purchases happened somewhere near the current share price, given that Volkswagen shares were trading in a narrow range during the second half of last year.

As I was putting the finishing touches to this update, several media reports came out about Porsche SE potentially increasing its stake further. If the Porsche/Piëch family are putting more of their family money towards Volkswagen shares, it's a reasonable bet that they already know a bit more about what is going to happen.

Right now, you can still purchase Volkswagen shares at the same price as Porsche SE is buying them for; OR you can buy them even cheaper by using an indirect route.

Publicly listed Porsche SE is a "gateway investment," i.e., it's an indirect investment in Volkswagen. Following the recent purchases, more than 90% of the Porsche SE portfolio consist of Volkswagen shares. As I described in my report, Volkswagen shares are currently incredibly cheap. You can buy them even less expensive – indirectly – by buying Porsche SE shares. The holding company discount is still almost 25%, i.e., buying Porsche SE is like (indirectly) buying Volkswagen shares at an almost 25% discount compared to the current share price.

On the whole, the scenario I laid out in my report has started to come true. Obviously, to the degree that this is possible, given that I only just published this report a mere two months ago. But we are off to a good start. These insider purchases, combined with the other news about the business, are pretty darn encouraging. This is an investment that could bear a lot of fruit over the coming years.

If you haven't read this report because you are not yet a Member, now might be a good time to upgrade (membership for an entire year costs a mere $49). The Porsche/Volkswagen report is more current than ever.

Also, I've got another investment report coming out in the next few days – dealing with a company that I bet virtually none of my readers will have ever come across before. These extensive pieces are only available to the Members of my website. If you sign up now, you'll get the next report the minute it's published.

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