Why Ferrari (NYSE:RACE)? Strong Earnings and Cash Flow

Why Ferrari (NYSE:RACE)? Strong Earnings and Cash Flow

$RACE

Shares of the iconic Italian Supercar maker Ferrari (NYSE:RACE) hit an all-time high earlier this week after the company increased its F-Y guidance following strong Q-3 earnings.

The Quarter’s operating profit rose 12% from a year ago, to 227 million euros ($251 million), on sales increases in Europe and Asia.

Following the strong results, the company boosted its expectations for full-year revenue, cash flow, and profit.

The Numbers

METRICQ-3 2019CHANGE (DECLINE) VS. Q-3 2018
Revenue915 million euros9%
Vehicle shipments2,4749.4%
Earnings before interest and tax (EBIT)227 million euros12%
EBIT margin24.8%0.6 pp higher
Net profit169 million euros(41%)
Industrial free cash flow138 million euros45.3%

Data source: Ferrari. Pp = percentage points. As of Nov. 4, 1 euro = $1.11. Industrial free cash flow is from Ferrari’s core automaking business and excludes results from its financial-services unit.

Notwithstanding the 41% decline in net profit from Q-3 of Y 2018, when an intellectual-property tax incentive in Italy gave the bottom line a boost, it was a terrific Quarter for the Maranello Outfit.

Shipments of both 8-cylinder and 12-cylinder models were up significantly from a year ago, and gains in revenue, operating income, and margin all followed.

  • Sales growth hasn’t yet recovered the pace we saw in the first quarter, when sales rose 23% year over year — but it was up a full percentage point from last Quarter. 
  • Sales of 8-cylinder models rose 9.5%, while sales of higher-profit 12-cylinder models rose 8.9%. Demand remains strong for both the 8-cylinder Portofino convertible and the 12-cylinder 812 Superfast. Ferrari will add an open-top version of the 812, dubbed the 812 GTS, in the first half of 2020. 
  • Deliveries in EMEA (Europe, Middle East, and Africa) rose 13.7%, deliveries in North and South America were roughly flat from a year ago, and deliveries in Asia Pacific (outside of China) grew 23%.
  • Deliveries in China, Hong Kong, and Taiwan were down a bit, a result of Ferrari’s decision to concentrate deliveries in the 1-H of Y 2019, ahead of new emissions regulations. 
  • Aside from a limited-run Pista model, Ferrari has now phased out the 8-cylinder 488 sports car. Shipments of its successor, the F8 Tributo, will begin in Q-4, with a convertible version due next year.
  • Deliveries of the exclusive limited-run Monza SP1 and SP2 models began in September.
  • It spent 303 million euros on share repurchases in the first nine months of 2019, and paid dividends totaling 195 million euros. 
  • As of 30 September Ferrari had 1.24 billion euros in debt attributable to its automaking business, versus 871 million euros in cash and equivalents, for total “net industrial debt” of 369 million euros. Ferrari had 370 million euros in net industrial debt as of the end of 2018.
  • The company had no special items in Q-3 of Y 2019 or the year-ago frame. 
A red Ferrari Portofino, a sharply-styled convertible sports car.

The Portofino convertible is Ferrari’s least expensive model, starting around $215,000 but a lengthy options list can boost the price to over $300,000. Image source: Ferrari. 

Ferrari told investors in August that it expected its F-Y results to come in at the high ends of the guidance ranges it gave in January. It has now taken that step further, boosting its guidance for revenue, earnings, and cash flow for the year. 

METRICQ3 2019CHANGE (DECLINE) VS. Q3 2018METRICNEW GUIDANCEPRIOR GUIDANCE2018 RESULT
Revenue915 million euros9%RevenueMore than 3.7 billion eurosMore than 3.5 billion euros3.4 billion euros
Vehicle shipments2,4749.4%Adjusted EBITDAAbout 1.27 billion eurosBetween 1.2 billion euros and 1.25 billion euros1.1 billion euros
Earnings before interest and tax (EBIT)227 million euros12%Adjusted EBITDA marginAbout 34%Unchanged32.6%
EBIT margin24.8%0.6 pp higherAdjusted EBITAbout 920 million eurosBetween 850 million euros and 900 million euros825 million euros
Net profit169 million euros(41%)Adjusted EBIT marginAbout 24.5%Unchanged24.1%
Industrial free cash flow138 million euros45.3%Adjusted earnings per share3.70 euros to 3.75 euros3.50 euros to 3.70 euros3.40 euros
Industrial free cash flowMore than 600 million eurosMore than 550 million euros400 million euros

Data source: Ferrari. EBITDA = earnings before interest, tax, depreciation, and amortization. 

During the earnings call, CEO Louis Camilleri said that after a review of its brand-licensing arrangements, Ferrari has found that its current offerings are too extensive, putting its brand equity in danger. In response, it will discontinue about half of its licensing agreements, while pushing its remaining efforts upscale, in part via a new long-term agreement with luxury clothing maker Giorgio Armani. 

CEO Camilleri said: “This agreement with such a recognized and prestigious Italian luxury company underscores our ambitions to elevate the standards and quality of all our offerings. Made in Italy will be a Key focus, and we will exert full control over the design, quality, and pricing of these products as well as their distribution, which will include a complete overhaul of our own stores and a revamp of our e-Commerce platforms.

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 Bullish, overhead resistance is NIL at and support at 164.49 as 3 of our 3 Key indicators have turned Very Bullish and the stock has established long term support ahead of this breakout.

Ferrari finished at 164.96, -0.48 Thursday in NY.

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

Have a terrific weekend

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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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