German sports car maker Porsche said on June 26 it expects its 2006/2007 profit to streak past 2.1 billion euros ($2.83 billion) thanks to hefty gains from its stake in Europe's biggest car maker Volkswagen.
Porsche, the Stuttgart-based maker of high-powered iconic sports cars like the 911 and Carrera GT, raised its profit forecast despite reporting almost stagnant car sales and revenues for the first ten months of the business year.
Porsche has adroitly used financial derivative contracts to protect its foreign exchange exposure and secure the value of its 31 percent VW stake, leading some to call Porsche a hedge fund with a captive automotive business.
Coupled with its prowess in engineering sleek sports cars like the Carrera GT and managing the lifecycles of its three main model lines - 911, the Cayenne and Boxster/Cayman -, Porsche is set for its 13th consecutive year of earnings growth.
"It is not difficult to predict that our annual earnings on 31 July 2007, that is at the end of this business year, will be significantly - and I mean significantly - better than the 2.1 billion euros ($2.83 billion) in the previous year," Chief Executive Wendelin Wiedeking told shareholders.
"The reason for this significant increase in profits is once again our stock hedging policy accompanying the acquisition of Volkswagen shares as well as the development of VW's profits and the revaluation of our stake in Volkswagen," he said.
According to Porsche, the revaluation alone amounts to 520 million euros. Vehicle sales in the first 10 months to the end of May dropped marginally to 79,540 units from 79,564 a year ago, while revenue edged slightly higher to 5.98 billion euros from 5.96 billion previously.
After sales of the Cayenne plunged by over 41 percent in the first six months, the roll-out of a revamped version of the sport utility vehicle helped narrow the drop to just 10.7 percent by the end of May to a total of 25,436 vehicles.
Porsche said sales of its high margin 911 sports coupe rose 12.2 percent to 31,287 cars, while deliveries of the Boxster/Cayman model line only dropped slightly to 22,806 units.
Capital expenditure including financial services rose by a third to 1.09 billion euros in the first ten months. Porsche said it expects "further momentum" entering the 2007/08 business year from the new 911 Turbo Cabriolet due in early September, as well as from entering new markets.
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The company is holding an extraordinary shareholders meeting on June 26 to sign off on its plans to change its legal status to a European company, or SE, from its current one as a German stock corporation.
The move comes as Porsche prepares to hive off its operational business, which will then fully transfer its profits to a newly created holding company that will also oversee its Volkswagen stake.
Due to German take-over law, Porsche recently launched a mandatory bid to buy the remaining shareholders of Volkswagen out but the sportscar maker opted to offer the minimum legal amount required in order to deter investors from accepting.
Only about 0.06 percent of VW's stock capital was tendered as a result.
While Porsche invested in total more than 5 billion euros in its VW stake, Wiedeking said he was still not satisfied by the restructuring progress at VW.
"The Volkswagen Group's cost structures are not right yet and there are still too many white spots on VW's world map, at least when it comes to profitability in individual markets," he said.