Luxury brands are not recession proof, reports a recent article in the Wall Street Journal.
However, investors seem to prefer expensive vehicles to cheaper ones. Porsche, for example, is at almost 17 times this year’s earnings.
However, both sides of the Atlantic are sounding alarm bells over economic concerns. Europe’s concerns center on energy. Even with massive government support, sky high energy prices will limit economic activity and consumer spending. In the U.S., concerns center on rising interest rates, which effects vehicle sales as vehicles are normally sold on credit.
These concerns push investors to take refuge in luxury brands. Luxury brands offer than better value for money. High-end producers screen classic metrics of company “quality” such as cash flows and returns on capital, to take advantage of this.
However, as we saw with Porsche during the Great Recession, luxury vehicles are not immune to economic downturns. Porsche sales fell 22.5% in 2008. The Porsche 911 sports car fared even worse, with production more than halving over the five years ending in 2011, report Quest analysts.
Leasing accounted for 43% of vehicles sold by Porsche in 2021 could be vulnerable. While some buyers probably leased for convenience, others likely couldn’t afford the brand without leasing. Rising interest rates will challenge leasing as secondhand car values fall from their recent highs.
However, mass market auto manufacturers, given the current inventory shortage, sit on fat order books that may shrink some, but weak demand and weak supply will keep prices high. Companies like General Motors and Stellantis, which restructured their operations during the previous downturn, are well prepared for an economic storm.
Even so, the coming downturn could put all automaker’s, even those making luxury autos, earnings to the test, with unclear results.