Ferrari (NYSE:RACE) the Automotive Sector Aristocrat 2.0

Ferrari (NYSE:RACE) the Automotive Sector Aristocrat 2.0

$RACE

Ferrari (NYSE:RACE) the Automotive Sector Aristocrat (1.0)

Ferrari (NYSE:RACE) unique from any other automotive company, and from other luxury goods companies.

There is huge support the quality of Ferrari’s Brand equity (it is the world’s #1 automotive brand), below is the list as we see it here at HeffX-LTN, some other analysts agree, as follows:

Note: I have been a Ferrari owner for 52 years, and have followed the company closely since it October 2015 IPO.

F1 Success: Scuderia Ferrari, the company’s racing team, is the most successful team in F1 history, having won 15 Drivers and 16 Constructors World Titles and 223 Grand Prix since Y 1950. This record of success is very important to the company’s brand image, and its value. With global viewership of about 425-M people, making it one of the highest viewed sporting events, F1 provides Ferrari with a significant platform for brand promotion. Further, Ferrari’s F1 activities serve as the company’s core marketing activity, with no other spending on traditional advertising. This is an important considering Ferrari is likely losing money on F1, which is likely consistent across the auto sector at roughly 2-4% of sales. Plus, F1 serves as a platform for technological innovation, which is ultimately used in Ferrari’s sports, limited edition, and GT cars that are sold to its clienti.

2. Long Life Asset Value: Controlled production and limited distribution support the scarcity value of Ferrari’s products, which drive pricing power and value strength. A high residual value is important since clients, when purchasing cars, take into account the expected residual value of the car in assessing total cost of ownership. Fully 9 of the Top 10 most expensive vehicles ever sold at auctioned are Ferrari models with the Topper a 1962 250 GTO selling for over $38-M. Private treaty transaction on this model are said to Top $75-M. This makes Ferrari unique among automakers, in that its residual values are not only resilient, but the passage of time and limited quantity available often warrants a premium price for older models. As indicated in the table below, given the limited supply in circulation and coveted nature of the brand, Ferraris have tended to sell for large premiums at auction and comprise nine of the Top 10 most valuable vehicles ever sold at auction

Top 10 Most Valuable Vehicles Auctioned

ModelYearBidAuction DateNotes
Ferrari 250 GTO Berlinetta1962$38.1mAug-14
Ferrari 335 S Spider Scaglietti1957$33.5mFeb-16Buyer: Lionel Messi
Mercedes-Benz W196 Silver Arrow1954$29.6mJul-13
Ferrari 275 GTB/4 S NART Spider1967$27.7mAug-13
Ferrari 275 GTB/C Speciale1964$26.4mAug-14
Ferrari 250 GT California Spider1961$18.5mFeb-15
Ferrari 250 LM by Scaglietti1964$17.6mAug-15
Ferrari 250 GT SWB California Spider1961$16.8mAug-15
Ferrari 250 GT SWB Berlinetta Speciale1962$16.5mAug-15
Ferrari 250b Testa Rossa1957$16.4mAug-13
Other Select Results
Ferrari Aperta2017$10.0mSep-17Highest ever fetched by a 21stcentury car
Ferrari F20012017$7.5mNov-17Raced by Michael Schumacher
Ferrari Daytona1969$2.2mSep-17Poor condition; 22,000 miles clocked
Ferrari 250 GT California1961$7.0mNov-10Buyer: Chris Evans. Formerly owned by Steve McQueen, James Coburn

3. Personalization: Ferrari’s premium pricing is also supported by its Limited Edition and 1-off cars, as well as highly personalized products. The bespoke programs, which are used by nearly all customers, add roughly 15% to the base selling price of the vehicles and carry very high margins. The company offers increasing tiers of personalization and customization in the Tailor Made Department. And 1-off and LE vehicles are offered to 1% of clients each year. The special 1-off cars, of which only 2-3 are produced each year for the company’s Top customers only and by invitation. The styling of the vehicles is critical to brand perception and demand further promoting the exclusivity and scarcity value of Ferrari products as few vehicles are truly alike. Pricing strategy is important as every 1% increase in price raises EBIT by 5% according to the official Ferrari date.

4. Owning a Ferrari: Ferrari is committed to delivering a unique driving experience with its cars., that includes the opportunity to participate in the Maranello Outfit world wide track and road events. A more exclusive offering is the XX program, in which Ferrari’s Top clients invited to participate in a non-competitive test driver program in an FXX K; a track version of the LaFerrari. This program enhances the customer experience and allows the company to test new technology without sacrificing limited F-1 track time. Ferrari also offers the “Maranello Experience,” in which clients and select prospects are invited to tour the Ferrari factories. The company’s focus on maximizing the ownership experience of its vehicles both enhances the brand value and bolsters customer loyalty. As I said at the opening of this article I have been an owner for 52 years, and have been a fan since Y 1953.

5. Engineering & Performance: Ferraris are different from luxury goods by offering in heritage and status along with tangible performance to its clienti and fans. Its innovations are in F-1 which enables the company to develop superior engine technology, lightweight carbon fiber chassis, traction control systems and aerodynamic designs that fundamentally make its vehicles far superior to the run of the mill sports car. A continued focus on research and development allows the company to continue to introduce superior products and generate demand worldwide.

6. Short Product Cycles: Ferrari maintains a short product cycle, which allows it to launch at least 1 new product every year for a typical life cycle of 4-5 years. This is facilitated by its flexible and efficient development / production process with only about 40 months required from initial development of a new model to production and delivery, and only 33 months for modified models. A more frequent product refresh cycle entices loyal Ferrari devotees into buying the next new model. This year 5 new models will be introduced.

Unit Volumes by Geography as of 30 September 2017

Country / RegionPercentage of Sales
EMEA44.5%
Americas33.5%
Rest of APAC14.7%
Greater China7.3%

Source: Ferrari

Production volumes demonstrate restraint and have expanded at a far slower rate than the growth rate of disposable income and wealth amongst the high net worth community as a whole. In Y 2017, the Group’s biggest growth came in the Rest of APAC region where shipments increased by 12.3%. However, Italy and France shipments expanded by 14.6% and 13.1%, respectively, underlining that even in the most established markets, Ferrari still has under-exploited potential. Ferrari grew in all other regions aside from Greater China where shipments declined by -0.3% due to the slow-down in the economy. By contrast, the Americas showed a healthy 4% increase. This diverse geographic distribution of sales indicates volume growth is not solely dependent on China or any single market. The United States, in particular, has been cited as a material growth opportunity. Any units not sold in the China market due to a potential economic slowdown or penetration challenges could be shifted to more developed markets (Americas and EMEA). Going forward, the strategy of management is to modestly grow production in line with the expansion of the high net worth market.

Ferrari Shipment Volumes (2012 – 2018)

Source: Ferrari

In F-Y 2017, a total of EUR 657-M was spent on research and development, mainly to support product range and components innovation for hybrid technology along with F1 activities. Ferrari maintains a strong balance sheet with net debt of EUR 340-M as of 31 December 2018.

7. The Time With Fiat (NYSE:FCAU): Fiat acquired Ferrari in Y 1965. Gianni Agnelli and Enzo Ferrari were friends, and Ferrari needed some financial support at the time. Henry Ford (NYSE:F) tried to buy Ferrari, but was turned down by The Boss. The level of growth achieved under the direction of Fiat is unknown. But, the rationale for Fiat’s divestment was due to Ferrari’s huge premium to the automotive sector given a stronger medium-term growth profile, more resilient financial performance, better profitability and higher return on invested capital. As is often the case with spin-offs, the creativity and ingenuity that was challenging under its former parent have been unleashed. Forza Ferrari!

Ferrari Holds a Place that is its Own: Ferrari is business with a long-standing history of prudent capital stewardship. It has positioned the brand as a coveted, high-performance Supercar. Its F1 racing success, resilient financial performance and huge brand value is driven by exclusivity and scarcity of its products, promote its status as a true stand alone luxury company. Yes, there are other luxury sports car models in the market which compete well in terms of performance and craftsmanship, but Ferrari’s brand occupies such a unique position within the mindset of auto consumers, it is immune from competitive forces than dog other brands. The desire to own a Ferrari and the special place it occupies within the psyche of its owners do not lessen when other Top line Supercars introduce a new model. Plus, its customer base, by virtue of their wealth and disposable income, often have large car collections and are loyal to the brand.

8. Ferrari’s Customer Base: Given the growth of Ferrari’s target demographic, the company’s volume growth forecasts appear reasonable. According to the research/analysis its global 2018 HNWI growth rates accelerated significantly with HNWI population expanding at 12.1%, and wealth at 14.8%. HNWI wealth continues to be on track to exceed $42 trillion by 2025. Each of the big three markets – Asia-Pacific, North America, and Europe – grew its HNWI population by about 7.5% and HNWI wealth by about 8.2%, representing large leaps in both North America and Europe and a slightly decelerated growth rate in Asia-Pacific.

Emerging markets drive more than 50% of the rise in wealth, driven by India’s growth of 20% in both wealth and population. A few markets, including Russia and Brazil, have improved their standings. Russia recorded the fastest growth, at about 20% for both its HNWI population and wealth, following modest Y 2015 decreases. Brazil had double-digit increases in both population and wealth following a significant decline in Y 2015.

9. DCF Method: Ferrari is a difficult business to model as there is limited visibility on when new Supercars will be introduced, how many will be produced and at what price. Moreover, the company is to some extent levered to the growth of the high net worth community and the degree to which customers will demand a richer mix of personalization. There are multiple levers to grow: price, product expansion, limited edition models and spare parts, as the number of cars in circulation grows, the revenue from spare parts sales and maintenance repairs expands yet this income is inherently back-end loaded. Rather than make precise forecasts in outer year periods, a 2-stage growth DCF (discounted cash flow) model is provided with a 4-year explicit growth forecast and a terminal value underpinned by conservative forecasts and assumptions.

Cash Flow Forecasts and Drivers

Assumptions

WACC5.8%
Perpetuity growth rate3.5%
Sustainable ROIC22.2%
Marginal tax rate24.0%

DCF Model

The model implies an intrinsic value of EUR 146.61 (USD 166.43)/share which provides Northside of 35% from current marks.

Note: Risks include a dilution of the brand through over-production or licensing, a decline in the high net worth population, degradation in perceived value or quality or impairment of it F1 reputation or perceived racing pedigree.

10. The Take-a-Way: Ferrari is a phenom; a luxury power brand offering drivers a sublime experience and membership of an exclusive club. As long as the company remains true to its legacy; craftsmanship, innovation and performance, the Supercars will likely remain in high demand (there is a years wait for the production models now). If the company’s international expansion plans are successful, it is likely that automotive sector’s cyclicality will not the company for some time. The Key to long-term success is to protect the Aristocrat brand at all cost. Our Northside outlook is firmly underpinned by price, mix, expansion of adjacent businesses and cost efficiencies.

Watch this column for much more from Ferrari coming very soon.

The 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.

Ferrari is the Aristocrat of the automotive sector.

HeffX-LTN overall technical outlook for RACE is Bullish across the board, and there is very little resistance here and none above 140.26. All of our Key indicators are Very Bullish in here.

The next F1 race is at Bahrain in less than 2 weeks.

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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