Re: The new cab isn't out yet............
12/07 DJ WSJ Porsche Powers Profit With Currency Plays
(From THE WALL STREET JOURNAL)
By Stephen Power
Frankfurt -- THE WEAK DOLLAR is denting many European car makers, but Porsche AG may have found a way of using the ailing buck to rev up its results.
Investment analysts believe sophisticated currency bets -- not sports cars like the 911 -- are turbo-charging Porsche's profits. Goldman Sachs, for one, mates that as much as 75% of the company's pretax profits -- or up to 800 million euros ($1.07 billion) of the 1.1 billion euros Porsche reported for the fiscal year that ended July 31 -- came from skillfully executing currency options. Other analysts say that percentage is too high, but most European auto watchers agree that Porsche probably racks up a big chunk of its operating profit from crafty currency plays.
The company declined to make Chief Financial Officer Holger Haerter available to comment on its foreign-exchange profits. A spokesman, Manfred Ayasse, acknowledges that Porsche's hedging generates a profit and is an important part of its overall strategy. Porsche currency exposure is fully hedged through July 31, 2007, and the auto maker is working to extend its protection well beyond that date, he adds. "Fully hedged" refers to taking currency positions that aim to protect all of a company's earnings from movements in the foreign-exchange market, but currency options and other derivatives can also become profit centers depending on how well a company makes its bets.
Without elaborating, Mr. Ayasse says Goldman's estimate of Porsche's currency earnings is "far too high," and "by far the majority" of Porsche's profits come from selling cars.
Among other analysts, Michael Raab at Sal. Oppenheim & Cie. in Frankfurt and Stephen Cheetham at Sanford C. Bernstein in London believe Porsche is getting 40% to 50% of its pretax profit from hedging. Porsche's apparent success in turning a profit while weathering the dollar's dips is rare these days, though auto makers have been able to do so in the past. For example, even as its North American unit struggled last year, DaimlerChrysler AG earned hundreds of millions of euros on currency hedges.
Typically, however, the strong euro makes German cars, French wines or British drugs more expensive for customers who pay in dollars and harms European manufacturers. Among car makers, Volkswagen AG expects a $1.3 billion loss in North America this year, largely as a result of the euro's strength. Ford Motor Co.'s Jaguar unit has cited the dollar's slide as contributing to its decision this year to cut output by 12%. BMW AG and DaimlerChrysler's Mercedes division have been hurt less because, unlike Porsche and Volkswagen, both operate U.S. plants that export cars to Europe, providing a natural hedge against exchange-rate swings.
At late afternoon in New York yesterday, the dollar was trading at $1.347, near its all-time low, against the euro. Pinpointing how much Porsche makes from currency options is difficult, because the family-controlled company reports earnings only twice a year. The company also provides fewer details about its accounting practices than other auto makers. But in its report, Goldman points out that Porsche books hedging profits in the cost-of-materials line in its profit-and-loss statement. The investment bank notes that in fiscal 2002-03 Porsche's raw-material costs fell 7% -- even though the company built 33% more cars than the year before. Goldman says falling development costs and other savings are "insufficient" to generate such a drop.
Porsche won't describe its hedging technique, but Goldman Sachs believes the car maker essentially bets on a weak dollar, by buying from another party -- presumably a bank -- an option to exchange dollars for euros at an artificially low exchange rate for the euro -- for example, 90 U.S. cents to one euro.
If the dollar's value on the open market falls below that level -- to, say, $1.20 for one euro -- Porsche gets a hefty cash payout, Goldman writes. Conversely, if the dollar strengthens, the only losses Porsche incurs are the premiums it has paid for buying those options. Although those premiums are high -- around 2% annually of the total amount Porsche wants to hedge, or $20 million on hypothetical U.S. revenues of $1 billion -- Porsche can afford them, since its profit margins are among the highest in the industry.
Goldman Sachs says Porsche's profit levels are unsustainable. Mr. Cheetham, the Bernstein analyst, agrees. "Hedging is just a short-run thing," he says. Predicting the dollar's swings is critical for Porsche. It makes its cars entirely in Europe, but generates 40% or 45% of its sales in the U.S. During the late 1980s and early 1990s, Porsche made little effort to shield itself from currency effects, raising prices as often as three times a year in response to a weak dollar. The result: Porsche's U.S. sales slid from 30,000 cars in 1986 to 4,500 in 1992.
Mr. Ayasse acknowledges the company raised its prices too often, but says other car makers "made this error, too." "We don't want to see negative surprises in the forthcoming years," he adds.
(END) Dow Jones Newswires
12-07-04 1941ET
