Ferrari (NYSE:RACE) the One Automaker to Buy
So let’s talk about Ferrari (NYSE:RACE) the one automaker the leads the entire automotive sector by ‘miles’
Ferrari celebrated its 70th Anni in Y 2017, and looks poised for record growth in the coming years.
The Big Q: Why Ferrari is racing ahead of all rivals?
Ferrari’s cars are the stuff of automotive myth and legend, and that Ferrari’s racing exploits have won a huge following of ardent fans all over the world.
What you might not know that Ferrari’s business fundamentals are just as powerful, as the sound of its V12 engines:
- Ferrari’s operating margins are 24.2%. That was a good Quarter as it posts margins over 20%. Contrast that with General Motors (NYSE: GM) at 7.5%, or BMW (OTCMKT: BAMXF) at 10.3% both good results for well-run mass-market and luxury automakers, respectively, in the current market.
- No automaker is recession-proof, but Ferrari might be. Its ultra-wealthy clientele is shielded from the global economy’s ups and downs. And with just 1 factory, and annual production of fewer than 10,000 vehicles, Ferrari does not have the huge fixed costs of a giant like GM or BMW, or the risk that it will be paying for idled assembly lines during a downturn.
- I do not see Ferraris being replaced by self-driving electric transport pods, ever. If anything, Ferrari will thrive on the contrast, as wealthy enthusiasts seek out opportunities to drive themselves in style. Ferrari is embracing hybrid technology, in part because it is now required in F1 racing, but its strong V8 and V12 gasoline engines will not go silent. As long as humans are legally allowed to drive, it seems likely that a few of us will be driving Ferraris.
On the Question of Growth: for years, the company has limited its annual production to preserve exclusivity and those margins. But CEO Sergio Marchionne has made it clear that Ferrari has several paths to profit growth, including modest increases in production, more limited-run and very high-priced exclusive models, expanded services for owners of older Ferraris, and careful extensions of its brand.
Mr. Marchionne is expected to lay out a detailed profit-growth plan in a presentation to investors soon, likely in Q-1 of Y of 2018. If the plan is solid, the presentation should serve as a catalyst for the stock.
Racing, a cornerstone of Ferrari’s business since the beginning in Y 1947, is both a revenue generator and a super brand-builder. Ferrari driver Sebastian Vettel finished second in the 2017 FIA Formula 1 Championship.
Ferrari’s shares have had a tremendous run, nearly 2Xing in value since the company’s October 2015 IPO. But its share price has fallen about 11% since its Q-2 earnings report in early November on a consolidation.
Ferrari is valued at about 28X earnings now down from 34.8X at its November highs. That’s steep compared to the big automakers, which tend to hang around 10X earnings when the economy is strong. But it’s about right for a luxury company, which is where Ferrari, with its fat margins and tremendous brand, arguably belongs
Again, Ferrari’s recent stock-price decline is a correction, not a major shift in sentiment. Unless the global economy suddenly really grim, the stock’s upward run looks likely to resume after Mr. Marchionne presents his plan, if not before.
I believe that investors who buy in here will be quite happy with the results in a couple of years.
|NYSE:RACE||105.8||13 December 2017||-0.85||106.65||107.14||105.8||732,900|
|HeffX-LTN Analysis for RACE||Overall||Short||Intermediate||Long|
|Bearish (-0.29)||Very Bearish (-0.52)||Neutral (-0.21)||Neutral (-0.15)|