Ferrari – Fiat = Accelerated margins

March 19, 2016 04:00 PM
Ferrari – Fiat = Accelerated margins

Ferrari – Fiat = Accelerated margins

In early February, shares in Ferrari (RACE) plunged more than 10% to $34.98 after the Italian supercar maker issued conservative guidance for its first full year independent from Fiat Chrysler (FCAU), sending the shares to their lowest level since it’s Oct. 21 initial public offering. On Jan. 3, 2016, Fiat Chrysler (the parent) completed the tax-free spin-off of the remaining 80% of Ferrari that it held. Each Fiat Chrysler shareholder received one Ferrari share for every 10 shares held. Ferrari was “carved-out” 10% of Fiat Chrysler on Oct. 21, 2015 in an IPO at $52 per share (see “Ferrari stalls”). 

Recognized by its rearing-stallion logo, Ferrari’s stock price has dropped 33% since the IPO. The sports carmaker eschews volume sales in favor of building its status brand around producing high-performance stylish sports cars, with a price tag starting around $300,000. Its cars are associated with its fabled Formula One Racing team, Scuderia Ferrari, having won 222 Grand Prix races. Models include the California T, 458 Speciale, F12berlinetta, FF, 458 Italia and 458 Spider. Since 1947, the exclusive cars have been made in Maranello, Italy, the company’s sole site, and sold strategically through selected dealerships. 

Ferrari recently reported record results for the fourth quarter and full-year 2015, including earnings per share before special items of $0.37 and $1.62, respectively. Consensus EPS was $0.35 and $1.53. In 2016, management expects revenue and profits to increase, but by a smaller amount than the market expected.  The Italian manufacturer of the $1.1 million LaFerrari stated it will probably ship 7,900 vehicles this year, about 3% more than last year’s figure of 7,664. Shipments grew about 6% in 2015, though deliveries in China slumped 22%. 

Current stock market volatility brought on by global economic uncertainty has added to the confusion about Ferrari’s outlook. The sell-off in Ferrari stock has been overdone, giving investors the opportunity to own the stock at a decent valuation. Ferrari stock will regularly trade at rich, luxury-goods valuation multiples. Substantial pricing power, enabled by a brand and strategic scarcity, supports the ultra-exclusivity of Ferrari cars. Pricing power also bolsters the company’s ability to generate stable revenue streams and economic returns through the business cycle. Ferrari believes it can reasonably grow volume by 4% per year through 2019 to 9,000 units. 

We value Ferrari at 11.5x FY16 EBITDA of about $778 million. Our valuation suggests Ferrari will continue to trade at a significant premium over mass market auto manufacturers given the company’s brand value and superior margins.

About the Author

Joe Cornell is a chartered financial analyst, a finance MBA and the author of McGraw-Hill’s “Spin-Off To Pay-Off.” As the founder and publisher of Spin-Off Research (www.spinoffresearch.com) he is widely-regarded to be among the foremost experts in this specialized area. @spinoffresearch