Porsche Success to Boost Vw Profitability

by : Anthony Fontanelle

Porsche AG's 911, a $72,400 sports car, helped make the carmaker the world's most profitable in 2006, says a Bloomberg report. Meanwhile, CEO Wendelin Wiedeking says earnings will grow even more thanks to models such as Volkswagen AG's Golf, a $15,000 hatchback.

A significant number of critics mocked the decision of the German sports car manufacturer to acquire a stake in Volkswagen a couple of years ago. Now, they are silenced by the clear showing of VW's quintessence in the manufacturer's auto industry existence. Their analysis could have been clouded by a . But, at present, it is high time for them to realize the salient point behind the acquisition.

Wiedeking, 54, said in an interview that the company may extend the luxury car's share-price gains by raising the stake and using Porsche's influence to transform Europe's biggest carmaker. Analysts and investors added Porsche's experience in lean production will boost Volkswagen's profitability, while the companies will save by sharing development costs.

At present, profit of the German Volkswagen, now 31 percent owned by Porsche, is creeping up since its tie-up with the Stuttgart-based automaker. Additionally, the partnership has helped Porsche's shares more than double.

"Porsche knows how to take care of itself and stands to gain significantly from its ownership in Volkswagen," said Peter Braendle, who helps manage about 63 billion Swiss francs or $52 billion in assets at Swisscanto Asset Management in Zurich, including shares in both car companies.

According to Adam Jonas, an analyst at Morgan Stanley in London, Porsche's profit may grow to more than 3 billion euros or $4.1 billion in five years from 1.39 billion euros in the 12 months ended July 2006. Jonas expects the company's shares to reach 1,650 euros within a year, compared with Thursday's closing price of 1,330 euros.

Juergen Meyer, who helps manage about 1.3 billion euros of assets at SEB Asset Management in Frankfurt, including Volkswagen and Porsche shares, noted that the collaboration between Porsche and Volkswagen is extremely vital to Porsche.

Bloomberg recently surveyed 36 analysts to know if they are in favor or against the holding of Volkswagen's shares. Of 36 analysts surveyed, 17 including Kohlhoff recommend selling the shares. Furthermore, 13 rate the shares "hold'' and six rate them "buy.''

"The influence of Porsche management at VW could prove significant," said Avaneesh Acquilla, an analyst at UBS Ltd. in London. "Volkswagen is increasingly the dominant share-price driver'' for Porsche.

The tie-up has brought out the best of both companies. "Volkswagen has become leaner," said Andreas Dittmer, who helps manage about 3.5 billion euros in assets at Apo Asset Management in Cologne, Germany, including Volkswagen shares.

On the other hand, Porsche is entitled to almost a third of Volkswagen's dividend, which was 497 million euros in 2006. Porsche's profit will rise "significantly - and I mean significantly" this year because of Volkswagen, Wiedeking said on June 26.

This is the obvious reason why Porsche is tightening its grip on Volkswagen. The huge slice of savings could be attributed to the sharing of technology as well as production costs. According to Bloomberg, since 2002, Volkswagen has built the body of Porsche's Cayenne sport-utility vehicle, which shares a platform with the VW Touareg and the Audi Q7.

"Research and development is the biggest cash drain for car companies," said Thomas Aney, an analyst at Dresdner Kleinwort in Frankfurt. "Porsche is going to save a ton of money piggy-backing on Volkswagen." The companies are working on gasoline-electric versions of their SUVs, and Porsche may begin offering diesel engines in its vehicles, a technology Volkswagen specializes in, Aney noted.