Porsche's derivatives success a mystery

Use of derivatives by German car manufacturer Porsche has resulted in a hike in the firms’ pre-tax earnings, from €2.11 billion last year to €5.86 billion for the year 2006/2007.

Earnings from stock option transactions boosted the firm’s total pre-tax profits by €3.59 billion - meaning that only 38% of Porsche's profits came from selling cars. The transactions relate to Porsche’s stake in fellow German auto manufacturer Volkswagen, which stands at 30.6%. But the firm has not revealed the details of the transactions.

“We have increased our stake in Volkswagen in several steps and we have had options secured to make sure that, with the rising price of the Volkswagen shares, we would not be negatively affected. There have been significant earnings resulting from those transactions,” said a spokesperson for Porsche.

“Porsche’s strategy is a well-kept secret,” said Georg Stuerzer, co-head of German equity reseach at UniCredit in Munich. “What we know is that it had options to increase its stake in Volkswagen, and that it has made €3.593 billion on these options, but we know nothing of the strategy and whether these were cash profits or down to fair-value accounting based on international financial reporting standards.”

“There are a number of possibilities,” said Philippe Houchois, analyst at JP Morgan in London. “They could have just bought options very early on, which would have allowed them to purchase more Volkswagen shares at a low price. These options would have been in-the-money and would have resulted in a mark-to-market gain of the share price at year-end in July, minus the price paid for the options.”

In addition to the earnings from options, Porsche has benefited from a one-off revaluation of its share in the Volkswagen group, which resulted in a €520.8 million addition to its accounts, and €702.4 million of earnings accrued by its 22.5% share held at the end of the business year.

Earnings from the company’s core business - making cars – have, however, been limited. “What seems to be clear is that Porsche’s earnings have plateaued,” said Houchois. “If you restate the non-recurring earnings, Porsche’s core earnings for actually making cars appear to be down by 30-35%.”

Some, however, say the use of derivatives in the Volkswagen investment has been a smart move. “Porsche is a fairly small company, so it is wise to limit the capital it puts in such a transaction. And if its long-term target is to increase its stake in Volkswagen, then why should it not buy options to secure its entry level?” asked Stuerzer.

See also: Cautious Porsche