Ferrari (NYSE:RACE): Invest in Its ‘Economic Moat’

Ferrari (NYSE:RACE): Invest in Its ‘Economic Moat’

$RACE

The 2 biggest stock market myths are “stocks that go up must come down,” and “stocks that have deep dived are due to rebound.”

The truth is that some stocks deep dive never rebound, and investors are stuck trying to catch a falling knife, as the Wall Street adage goes. Other times stocks can trade at sky-high valuations indefinitely.

Here I talk about Ferrari (NYSE:RACE) andher what makes it special, and why savvy investors should consider buying shares even near all-time highs.

The Big Q: What is an economic moat?

The Big A: Simply put is/are a sustainable competitive advantage/s.

Ferrari is a perfect example of such a company.

Ferrari’s moat is based on its ultraluxury brand image, formed over decades of racing dominance and insanely exclusive Supercar sales, which supports strong pricing power.

Unfortunately for most automotive investors, an automaker such as Ford, Toyota, or General Motors will simply never have the brand image or pricing power that comes attached to a Ferrari no matter what they do. So, for Ferrari investors, that’s powerful.

To see just how powerful Ferrari’s brand image, pricing power, and profitability are, consider the following.

Operating margin is a measure of profitability; it tells you how much of every dollar remains after subtracting costs of goods sold and operating expenses. Luxury goods carry higher operating margins because consumers are willing to pay more for a similar product with a brand name, and more of each dollar goes to the bottom line.

Manufacturing Supercars is expensive, and the majority of automakers post operating margins in the single digits. Ferrari, however, is able to command incredibly high average transaction prices for its vehicles, and is able to translate that into profit that resembles an ultra luxury goods manufacturer rather than a carmaker.

Now this: Ferrari generated over $1-B in revenue during Q-2 of Y 2019 with just 2,671 vehicle shipments.

And this: Return on Invested Capital (ROIC), a metric that gives investors a better understanding of how well a company is using its cash to generate returns. The higher an ROIC number, the better.

Ferrari has left the mainstream and traditional luxury automakers in its exhaust when it comes to generating value with its capital.

And, the fact that Ferrari’s ROIC is increasing suggests its competitive advantages are actually becoming more powerful and valuable, rather than deteriorating.

Ferrari, then, thanks to its competitive advantages, is extremely profitable compared to even some of the best competitors. And it does not follow many of the auto industry’s norms.

Most automakers race to gain market share and increase sales annually, Ferrari does not, it wants to limit its annual sales gains to retain its exclusivity and lucrative pricing power, as demand for its products always exceeds its supply.

The good news for investors is that Ferrari’s management laid out a plan that aims to 2X profit through Y 2022 by launching 15 vehicles, including its 1st SUV or FUV. It believes it can do this without hindering its exclusivity, partly thanks to a growing wealthy class in China.

Another automotive industry rule that Ferrari ignores is the cyclical nature of vehicle sales.

When a recession hits, consumers put off purchasing big-ticket items such as cars, and inevitably investors in major automakers tend to sell their shares.

Ferrari on the other hand, sells its vehicles to consumers who are not worried about recessions, and will buy the luxury sports cars during economic downturns, or as the overall auto industry slows.

Ferrari is simply unlike any other automaker, and that is partly why it trades at a forward price-to-earnings estimate of 36X.

As an investor, you want to buy and hold stocks long-term, and you want to choose companies with durable competitive advantages that will last.

Ferrari has incredible advantages thanks to its exclusivity, pricing power, and racing brand image, and no matter how much competing automakers wish otherwise, they simply are not or will not ever turn into the next Ferrari.

An 10 years from now Ferrari will still have a waitlist for its Supercars, and it will still be generating strong operating margins and ROIC. Ferrari will likely also be trading at a steep valuation because these luxury qualities are rare, especially within the automotive industry.

You can buy Ferrari near its all-time high because it has durable advantages that might put more distance between itself and its competitors down the road, though Ferrari really has no competitors as…

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 Neutral to Bearish, overhead resistance is at 164.62 and support at 159.89 all Key indicators are flashing Neutral to Bullish in here. Ferrari finished at 159.90, +1.89 Wednesday in NY.

Note: Goldman Sachs upgraded Ferrari to ‘buy‘ from ‘neutral ‘calling the stock’s pullback a good “entry point.” “We upgrade Ferrari from Neutral to Buy, offering 15% upside to our new price targets of 182. Our thesis, outlined in Life of Luxury published last month, is fundamentally unchanged post Ferrari’s in-line 2-Q results. We view the stock’s recent pullback (-7.5% since July 16) as a good entry point in here.

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

Stay tuned…

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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