The World’s #1 Luxury Purchase: Ferrari (NYSE:RACE)

The World’s #1 Luxury Purchase: Ferrari (NYSE:RACE)

The World’s #1 Luxury Purchase: Ferrari (NYSE:RACE)


A Ferrari (NYSE:RACE) car is a luxury purchase, they are expensive, exclusive, and there is a waiting lists to get a new one, and on the Special Edition cars Ferrari has conditions for purchase, it governs the demand.

The iconic Italian super and hypersuper carmaker keeps its Prancing Stallions in short supply.

The Vintage and Classic Ferrari cars are the most expensive in the world, and their prices have been rising at the annualized rate of 10.45% since 1995.

Recently we have seen stocks of makers of luxury back in investor favor.

Chinese growth is returning, plus tax cuts for wealthy Americans would be happy news for the people who sell luxury goods.

Ferrari the #1 Luxury automotive brand will likely benefit. As it operates in a lively part of the market world wide.

Car sales outpaced all other categories of luxury spending in Y 2016, rising 8%, according to the data, while personal luxury goods declined 1% in the frame.

Growth in sales of luxury cars is outstripping that for watches and handbags, the data reveals.

Ferrari went public in October of Y 2016 and its stock is performing nicely, actually extra for a stock in the consumer goods/automotive sector.

The shares are trading at about 27X its expected earnings, much higher than the 19.5X average for Intelligence’s Index of luxury companies.

The premium looks to be justified in here.

Supercars are the hot ticket now among the HNWI’s (high-net worth individuals), while the “Prancing Stallion” badge of exclusivity has value, have a look at Hermes, its stock’s forward P/E ratio (price to earnings ratio) is 37X.

Ferrari is a carmaker, but it cannot be compared with the high-volume luxury carmakers, it is a “Special Situation”

The brand is tied to F1 racing, and it is the all time winningest contender, and is set to continue this year with the opening season win in Melbourne beating MercedesAMG to the chequered flag by about 10secs.

The shares of BMW AG and Daimler AG trade on about 8X future earnings, Ford and GM much less.

The company generated $302-M in industrial free cash flow in Y 2016, and spent 11% of sales on CAPEX.

Hermes’s operational investments were 5% of sales, and as at Hermes, exclusivity puts a cap on growth.

An Exane BNP Paribas analysts say “category segregation” has been central to Hermes’s success. This is where it keeps core leather goods expensive and out of reach, while selling more affordable silk scarves and costume jewelry to a bigger group of punters.

Yet the Hermes strategy is looking shaky, it argues, as it introduces cheaper handbags.

Ferrari faces a similar dilemma.

It could make more modestly priced car, and may be set to reintroduce the Dino of the 60’s and 70’s as an entry level car, management vows not to make and SUV.

It should be noted that its alternative is confining lower price points to other luxury categories such as watches, clothing and accessories, last year such collateral sales resulted in about 11% of gross revenue from its own stores and licensing contracts.

Ferrari theme parks are another area of expansion, 1st in Abu Dhabi, 2nd in Spain, and the rumored 3rd in the US. These could be decent money makers and serve to introduce the brand to a very wide and young audience.

Ferrari’s CEO Sergio Marchionne stated goal is to make Ferrari a full on Luxury brand and will take charge of that task when he ankles his top spot at Fiat-Chrysler in about 18 months.

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.

Symbol Last Trade Date Change Open High Low Volume
NYSE:RACE 74.85 29 March 2017 -0.01 74.68 74.99 74.55 432,800
HeffX-LTN Analysis for RACE: Overall Short Intermediate Long
Very Bullish (0.57) Bullish (0.38) Very Bullish (0.89) Bullish (0.46)

Stay tuned…

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