FLASH: Morgan Stanley in a note Thursday weighs in on Ferrari stock and its strong rally
“RACE is our highest quality name. However, everything comes at a price. The stock is getting very pricey and increasingly requires looking beyond 2022 for continued value,” declared analyst Adam Jonas.
“Solving for what is ‘priced into a stock,’ if one were to assume 20X EV/EBITDA as the sustainable benchmark for the company (aggressive), then just sustaining €1.4-B or so of EBITDA (33% EBITDA margin) would do the trick. This is in line with our current 2020 forecast which is in the consensus ballpark. If 15X EV/EBITDA seems more reasonable to you, then the current price fully discounts the midpoint of Ferrari management´s end-of-current-plan 2022 EBITDA target €1.8 to €2-B,” he adds.
MS keeps an Overweight rating on Ferrari while advising a dose of calm may be needed by investors in regard to short-term expectations. The sell-side consensus rating on Ferrari is Outperform.
A deeper look at Ferrari from HeffX-LTN, as follows:
FLASH: Ferrari sentiment running high, The Bulls are in-charge
Ferrari (NYSE:RACE) is not your typical car company, and analyzing the stock is not a typical process, most sector analysts do not understand it and how it works, the iconic Italian Supercar maker is The Aristocrat of the Automotive sector.
I have been a fan of Ferrari since I was a boy in the 1950’s and I bought my 1st 1 in 1967, a Fly Yellow 275 GTS, I have driven them ever since, and am 1 of a handful of analyst that cover the stock.
A Ferrari car is the dream car of many men since boyhood too. Investors that fit this description may buy the stock as an exclusive item for their portfolios.
In these conditions, buying the stock if you cannot afford a car will make 1 feel like an owner too. This seems is a growth driver, and significant to consider in the Bull case.
Ferrari also runs Scuderia Ferrari. The winningest F1 racing team in history, some believe that it does not have a huge an impact on sales, but impact brand value, and so the stock price. This should be another growth driver. Ferrari is 1 of the world’s Top brands and the Top brand in the sector. Ferrari thus has virtually no advertising cost and is paid 100’s of millions of dollars to race in F1 annually,
The company reports that their production cars are sold before having shipped any car to its owner, leaving people on line for deliveries. Some for years
In the Limited Edition series, the company selects the most loyal clients, and without exception each of them is pleased to buy the car with the caveat that it not be offered for sale for at least 3 years.
Demand for Tier 1 Ferraris is above what the company will supply according to Enzo’s edict early on,
The result of this is pricing power for the company over its customers, a competitive advantage that has a significant effect on the car and stock prices too.
These factors have fueled stock price momentum since sales growth alone cannot support it on its own. Ferrari is still a relatively small company in the scheme of the sector.
Ferrari Bulls are not concerned with sales or EPS growth though it has beat in every Q but 1 since it’s IPO in October 2016, this is not a usual company and they do not expect to pay a usual auto sector price for the stock, as it is a luxury brand as management has, and continues to declare.
The exhibit above shows the trend of the financials. Revenue, EBIT and Net profit have been growing at a CAGR of 5.5%, 20.7% and 31.7%, respectively. Although net sales did not have an outstanding growth, net margin expanded from 9.6% to 23% which is outstanding.
Some believe that margin expansion will be capped long term, and should not continue to be a growth driver for net profits. So, earnings growth will look like the sales growth in the upcoming years. But, Ferrari know how to manage its production and its margins beyond the competition and analysts understanding.
The Maranello Outfit pays its investors with an ROE of 58%, its constant Buyback program and it pay a dividend. Plus none of the major shareholders are sellers, the supply is tight, just like the Supercars.
A normal auto business, 1 that can increase production, and grow without affecting its economic moat, with an ROE of 58%, would reinvest all of its earnings in the search to maximize shareholder’s wealth creation.
Thus, paying a dividend and buying back shares would not make sense, unless the shares trade below book value, which is not the case here, Ferrari trades at a premium, as a luxury brand..
Ferrari has a production growth constraint so it does not need to reinvest all of its earnings to maintain operations and generate a small growth.
The Big Q: What to do with the cash?
The Big A: The company pays 30% of earnings as dividends, and a share buyback program. With the stock price is nearly 170, such a dividend would yield under 1%, while buying shares would yield 2.6%.
None of these returns compare with the aforementioned 58%. Another use is repaying its debt, which bears a 1.5% interest, which does not hold a candle to the ROE either.
Valuation multiples indicate that the stock is expensive, but this is Ferrari, not Ford. Ferrari is a luxury brand, Ford is a giant me-too car maker.
Net profits growing at a 10% rate would not be enough to support a P/E ratio of 36.82X. Analysts expect a CAGR of 15.6% in EPS over the next 5 years, so the PEG equals 2.36, which reaffirms the over-valuation. And, the average analyst price target is 155.28, Our’s is 200 long term.
Ferrari Bulls are fanatics, racing performance and pricing power rules. While the bears argue that the financials do not justify such a high valuation. Bulls are in charge.
It a gem in is a gem in any portfolio, and could yield unexpected returns. If you bought it when I called in at 40 on 16 July 2017 you have a huge winner that will go on winning.
I am a fan of Ferraris, I am a fan of the stock, like the company, it is a great business with a wide economic moat and will continue to trade beyond most analyst’s and investor expectations.
Do not short Ferrari, as the trend is Very Bullish now. And Ferrari almost always Beats the Street.
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, very light overhead resistance now stands at 170.83, and very strong support at 164.47, all Key indicators are Very Bullish in here. Ferrari finished at 166.43 -0.57 on lite volume Thursday in NY.
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