Wall Street Upgrading Ferrari (NYSE:RACE) Stock
$RACE, $F, $GM
Wall Street analysts upgrade stocks daily, they upgrade some, downgrade some, and initiate coverage on some. I cover them daily in this column.
Thursday, I am taking about a favorite of mine and HeffX-LTN’s Ferrari NV (NYSE:RACE) that we have been following since pre-IPO in October 2105
Ferrari’s shares are + 68% over the past 52 weeks, and this morning receiving its its second major buy rating in 2 weeks. I declared it a buy in mid-July of Y 2016 at 40/share, my target was 60, it hit 60 year end, and I raise the target to 80.
Ferrari’s latest good news began on 13 March when Jefferies & Co. announced it was initiating coverage of Ferrari stock with a buy rating and a 74 price target.
An aside: back in the day, Boyd Jefferies the founder of Jefferies & Company and I were friends, we both drove GTB4/cams w/6carbs. Same color!
Jefferies picked Ferrari to outperform the rest of the stock market by growing its profits at 2X the rate it grows its sales over the next 5 years.
Priced under 66/share prior to receiving Jefferies’ endorsement, Ferrari has already gained more than 6%, achieving 50% of its projected 52-wk return in less than 2 weeks.
The momentum is not lost on Citigroup, who has issued an upgrade of its own.
Citi had previously valued Ferrari stock at 51.75). However, Citi has upped that price target by more than 50%, to 80/share, same as my call in early January, nearly 3 months ago.
Here is why: Ferrari is selling a luxury good into a wealthy market in limited supply, and it has the ability to increase supply without cannibalizing profit. This puts Ferrari in a position to 1. raise its prices, 2. double its unit sales in 10 years, and 3. cut costs all at the same time. And as Hermes reported Wednesday the luxury sector is showing strength, Ferrari is a luxury brand, and the world most recognizable automobile brand too
The Valuation Formula
Ferrari is priced above 31X earnings in here, and at a 22% premium to other “Luxury” group stocks, and costs “significantly” more than mass market automakers such as Ford (NYSE:F) at 10X earnings, and General Motors (NYSE:GM) at about 5+X.
As I look at it today, the company should be able to 2X its unit sales over the next 10 years, while at least holding prices steady relative to the rest of the market, and maybe even raising them a bit.
That is a 7% annualized sales growth. And Jefferies says that for the next 5 years at least, the company should be able grow its EPS at 2X the pace of revenue growth.
So, on those assumptions, Jefferies and Citi are predicting 14% or 15% annualized earnings growth over the next 5 years, just as we did here about 3 months ago.
S&P Global Market Intelligence even goes so far as to assert that growth could average 16.5% over this frame, and S&P Global data confirms that the iconic Italian carmaker is generating far more free cash flow than its income statement shows.
Cash profit last year crossed the finish line at $876-M, that is more than 2X the company’s $421-M in GAAP net profit.
So, as I value Ferrari stock at market cap of $12.9-B and divide that by free cash flow at $876-M, we have Ferrari selling for less than 15X free cash flow now, and likely to grow its profits at somewhere between 14% and 16.5% over the next 5 years.
Add the 1% dividend yield, and that makes Ferrari stock a Buy, and the new target at 100/share.
Outlook: Bullish to Very Bullish
|NYSE:RACE||70.72||23 March 2017||2.54||69.56||71.08||69.49||818,600|
|HeffX-LTN Analysis for RACE:||Overall||Short||Intermediate||Long|
|Bullish (0.47)||Bullish (0.28)||Very Bullish (0.67)||Bullish (0.46)|
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