Ferrari (NYSE:RACE) Deserves and Receives a Luxury Valuation

$RACE

Ferrari (NYSE:RACE) has climbed 64.9% YTD thanks to EPS and revenue beats, in the 9 months of Y 2019, net revenue rose 10.3%, while EBIT increased 10.5% boosted by Monza SP1 and SP2.

The company deserves a premium valuation because of its brand value, high margins, and consistent sales growth going forward.

Since January 2019, the stock has delivered a staggering 64.9% return before dividends despite its valuation and global economic growth concerns.

The rally was driven by a few Quarterly EPS and revenue surprises.

The Key message of the 1st 3 Quarters of Y 2019 is that Ferrari has been growing at a rapid pace and delivering on its promises, bolstering Bullish sentiment.

Ferrari increased shipments driving revenue higher, and it actively invested in research & development to protect its appeal of a luxury high-performance vehicles company.

The company has to push engineering excellence to the extremes. Without Top tier electronics, and high-class engines in its Supercars, Ferrari is not Ferrari.

Ferrari is the Aristocrat of the sector and will lag. So, bigger investments in unique technologies development are the norm.

At the same time, 1st deliveries of Icona series’ Monza SP1 and SP2 spurred EBIT. The price of Monza SP1 is about $1.75-M so, it is not coincidental the series bolstered earnings before interest and tax, which increased 10.5% compared to the same frame in Y 2018. However, higher net financial expenses and a much higher tax rate took a toll on the firm’s bottom line, but it still remained extremely profitable compared to car companies.

Along with its high margins, the company delivered robust cash flow growth. Its net CFFO YTD increased 53% thanks to favorable working capital change and lower taxes paid. 34.3% net CFFO last 12 month’s margin underpins excellent earnings quality.

Free Cash Flow: in the case of Ferrari, we can use its own definition of FCF or FCF from industrial activities which excludes financial services activities and a more conventional 1; net CFFO minus investments PP&E and intangibles.

According to the 1st definition, YTD Y 2019, the company generated €559-M, and in the 2nd case, its cash surplus equaled €496-M. LTM FCF ROTC stands at 8.8%, which is a solid result.

Ferrari has to reinvest funds to remain competitive and secure market share and brand image.

As it was mentioned on Pg 20 of the Interim report: “We significantly increased our capital expenditure in 2018 and we expect our capital expenditure will continue to increase in 2019 to further our investments in hybrid technology and to support the expansion of our product range.”

So, the cash surplus may shrink, but that is not a Bearish signal.

Valuation is a sophisticated task. And from a conventional POV its multiples appear inflated. Noting with a 22.7x Forward EV/EBITDA and Return on Total Capital of 16.3%, the stock looks overvalued to some.

Ferrari it is a luxury company with healthy industry-leading margins and Ferrari’s clients value not practicability but the appeal and image, the aura that the brand glows.

Ferrari is the Hermès or Louis Vuitton of automakers. Hence, its valuation should be well above the auto manufacturers’ median multiples because they have little in common. Hermès currently trades at 41x Price/2020e EPS.

Ferrari has no publicly-traded peers, Aston Martin is a 106 year old bankrupt poser.

Ferrari has recently announced that it would not present its fully electric vehicle until after Y 2025 because of a delay in battery development.

Bears interpreted this as a sell signal, and on 12 and 13 December 12 the stock came under some pressure. On 16 December a few skeptics perhaps did some profit-taking and closed short positions as the share price recuperated and edged closerto it all time highs.

The Big Q: Should EV issues be worrisome?

The Big A: No.

Ferrari anticipates 60% of its Supercars sold by Y 2022 to be hybrids. This is a realistic, and so no urgency and necessity to rush into the fully electric vehicles game.

Ferrari has a different clientele, its clienti value big horsepower, luxury appeal, uniqueness, and style, but not efficiency. So, not critical to valuation.

I expect the stock to climb higher, many do not, as in the automobile business, Ferraris are not for everyone.

Ferrari is the Aristocrat of the automotive sector.

Enzo Ferrari’s iconic Italian Supercar manufacturer claimed the title according to the latest Brand Finance Global 500 2019 report launched at the World Economic Forum in Davos.

HeffX-LTN overall technical outlook for RACE is Very Bullish, overhead resistance is 171.90, and Key support at 167.08, a Key indicators is Very Bullish (the stock is oversold) and the stock has established long term support ahead of this breakout.

Ferrari finished at 167.05, + 0.07 Wednesday in NY.

Ferrari will continue to create value in the long term. Ferrari is a quality 1st long term luxury products investment, and I see it at 200+/share in that frame.

Ferrari will continue to create value in the long term. Ferrari is a quality 1st long term luxury products investment, and I see it at 200+/share in that frame.

Stay tuned…

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