FINDON, SUSSEX - The motoring press has given its verdict on Porsche’s gamble to break with tradition and add a luxury Sport Utility Vehicle to its portfolio of sports cars – just about 100 per cent of journalists seem to have fallen in love with the new Cayenne.

Now it is the turn of hard-nosed investment bankers to have their say – and they are also falling over themselves to heap praise on Porsche.

Berenberg Bank of Hamburg, in a report entitled - “The Porsche Cayenne – Hot and Spicy” waxes lyrical about the new machine. (The Cayenne is named after the spicy pepper and town of the same name in French Guyana)

“The first SUV made by Porsche…. has fully met our high expectations. In addition to an on-road performance only known from sports cars so far, the superior off-road capabilities of the new mainstay of hope, which will represent the new benchmark in the luxury SUV segment, were particularly impressive in this respect,” Berenberg Bank said.

Being bankers, more down-to-earth considerations are also important, and met, by the Cayenne.

“The impact on return on capital …… will be positive. Owing to the joint development of the car with the VW Touareg and the resulting very low manufacturing exposure for the car only a small amount of capital was exposed,” the bank said.

SUPPLIER BOTTLENECK?
Berenberg Bank does see one area of potential problems when it asks – “Will the suppliers be the bottleneck?”

The bank said start-up difficulties with new models can often be a problem, and quotes Porsche chief executive Wendelin Wiedeking saying that some suppliers were not able to fulfil the high quality requirements of Porsche on time.

“In a worst case scenario this would delay the market launch and the car’s availability,” Berenberg Bank said, without saying that this is actually going to happen.

Investment banker Morgan Stanley believes the Cayenne will add hugely to the profitability of Porsche.

“Incremental data on the Cayenne appears positive in terms of volume and mix. Anecdotal evidence suggest one quarter to one third of buyers would opt for the Turbo – an incremental 10,000 units to our Cayenne forecast would add at least ¤5 to our 2004 earnings per share estimate which currently stands at ¤35,” said Morgan Stanley.

In early December Porsche’s Wiedeking said the company had already sold a full year’s Cayenne production of 25,000 before the launch. This would offset weak car markets, and faltering sales of the Porsche 911.

Wiedeking declined to confirm reports that Porsche plans to raise annual Cayenne sales to 40,000, but he said the Leipzig plant could handle increased production.

PROFIT BOOST
Another investment banker, Deutsche Bank, expects Cayenne sales to be closer to 35,000 than 25,000 a year, and this should help Porsche profits to leap again in the current and next financial years.

“Our earnings per share target now stands at ¤37 and ¤48 for 2002/2003 and 2003/2004, after ¤27.8 last year. With this continuing (Cayenne led) momentum we regard Porsche as a very attractive play and reiterate our buy recommendation,” said Deutsche Banks.

There are some more cautious voices though to be heard on the impact of the Cayenne.

UBS Warburg warned that capital expenditure rose ¤269 million in the 2002 fiscal year to ¤400 million, with a substantial portion related to tooling requirements for the Cayenne, and is expected to rise to ¤600 million in the 2003 fiscal year.

The Cayenne’s warm reception doesn’t mean that Porsche’s prospects are trouble-free, according to UBS Warburg.

“”Although the company is confident on the prospects for the Cayenne, it gave a relatively cautious outlook statement, mainly due to political and macro-economic factors affecting the 911 and Boxster businesses.”

STOCK MARKET PROSPECTS UNDERWHELM UBS
UBS Warburg is also worried by the amount of profit made by Porsche – about 20 per cent at the pretax level – which is accounted for by potentially unstable gains from foreign exchange transactions.

This all leaves UBS Warburg distinctly underwhelmed by Porsche’s stock market prospects.

“We see little positive momentum for the shares. The positive operational performance is, in our view, tempered by the sharply rising capital expenditure and uncertain economic environment,” UBS Warburg said.

FT’S LEX THINKS SUV BOOM WILL CONTINUE
Some experts have wondered whether the boom in SUV sales in North America – where most Cayennes will be sold – can possibly continue. The Financial Time’s Lex column is convinced that gravity can still be cheated for the foreseeable future, even though SUV sales in the U.S. now account for about half the new cars sold.

“At these levels of market penetration, the SUV must be about to peak, leaving latecomers like Porsche with oil on their driving gloves?” asks Lex.

“Not so. Fears of market saturation are not borne out by orders for the Cayenne, which already account for the first year’s production run of 25,000 cars,” Lex said.

Lex reckons that the Cayenne, the VW Touareg (jointly developed with the Cayenne) and the Volvo XC-90 will add more than 100,000 vehicles to the 700,000 SUVs currently sold in a year.

“But as long as motorists with increasingly suburban lives feel the need to compensate with vehicles that can cross the badlands, SUV demand will grow,” Lex said.

Neil Winton, December 10, 2002

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