Italian supercar maker Ferrari will officially price its IPO on Tuesday. A range between $US48 and $US52 per share is expected, in an offering that could raise nearly $US10 billion.
But if you buy Ferrari what are you buying?
By the numbers, you’re buying shares that will be priced at over 30 times trailing earnings, which implies some significant future growth for the car maker. And Ferrari did disclose that it plans to raise its notoriously low annual production to 9,000 from the currently 7,000 cars — in a few years.
Sergio Marchionne, the CEO of Ferrari’s parent, Fiat Chrysler Automobiles, has insisted that the company should be valued not as an automaker, but as a luxury brand. Luxury brands do command multiples over 30 times earnings, compared with the less than 10 times fetched by carmakers.
So far, Marchionne’s pitch has worked. By all accounts, the Ferrari IPO is being well received by global investors: Bloomberg reports that it has been oversubscribed since before the official sale process even began.
Why? In a word: exclusivity. But it’s not just the artificial exclusivity that Ferrari creates by restricting production.
There’s something else, that makes Ferrari unique among luxury brands and carmakers alike. The company’s choice of ticker symbol — RACE — offers a good clue to what it is.
Life is just waiting for racing
The core of the Ferrari brand is the Scuderia Ferrari. The Scuderia is usually described as Ferrari’s “racing arm,” but the fact is that without the Scuderia, there would be no Ferrari as most people know it.
Enzo Ferrari, who founded Ferrari, only sold road cars to fund the racing effort.
Ferrari ownership might be exclusive. But Ferrari racing is even more exclusive – with only two people, basically, able to race on the company’s Formula One team.
This is what 14 year-olds dream of, and even if they are lucky enough to be able to buy a Ferrari one day – the Scuderia is still unattainable. (Though Ferrari’s most loyal “clients” – they’re never just customers – can get close with an invite to drive in one of the company’s Pro-Am races).
“Ferrari still has the ability too make people dream, and that’s something a lot of other car brands have lost,” said Fabrice Paget, who currently runs The Luxury Brand Agency and formerly was Cartier’s Worldwide Marketing and Product Development Director for Watches.
Matthew DeBord/Business Insider
A bright red paradox
Much of the fervor around Ferrari’s IPO is being driven by just those dreamy intangibles. On paper, a $US10-billion valuation is difficult to rationally justify. But as Business Insider’s Jim Edwards pointed out in scrutinizing the SEC filing, most of Ferrari’s true value fits into more esoteric categories on the balance sheet: $US1 billion in goodwill and intangible assets out of $US5 billion in total assets.
Brian Hamilton, chairman of Sageworks, a financial analytics firm, echoed that.
“We’ve seen a few analysts find issue with Ferrari’s valuation,” he said in an email. “However, it’s important to keep in mind that Ferrari is a profitable company with a strong brand that provides a great deal of value (both tangible and intangible) for Fiat-Chrysler.”
He added: “[T]his is a company that provides not only significant earnings and revenue for it’s parent company, but also prestige. The company is growing revenues consistently, they have a net profit margin that’s approaching double digits, they have nearly a half a billion dollars in positive cash flow, and they’re only valued at 3 times their trailing sales, which is quite reasonable. There is a lot to like here.”
Still, there will be challenges ahead.
Marchionne is trying to keep two balls in the air with the IPO: raising money to get FCA, probably the weakest large global automaker, on track to endure a future downturn; and preserve the valuable Ferrari legacy.
Achieving the latter, while also meeting investor expectations for some kind of growth, is where Ferrari risks running into trouble.
Building 2,000 additional cars by 2019 will boost sales, but also erode some of the brand’s exclusivity. Licensing could also add — though Ferrari-branded sneakers and watches and sunglasses already exist — but here, too, there’s a downside.
“The challenge for a brand like [Ferrari] at the end of the day you are what you sell,” Paget said. “If most of what you sell is t-shirts, caps, and mugs, that’s who you are becoming. The challenge is to not take the easy money, but to control what you develop.”
Is change good?
What if Ferrari changes? Already some of those guarding against its transformation have been pushed out.
Luca di Montezemolo, Ferrari’s longtime former chairman, always named success in Formula One as a key Ferrari value (along with things like beauty and tradition).
But he couldn’t hold the line against Marchionne’s goal of tapping Ferrari’s value to ease FCA debt situation and fuel its expansion. Montezemolo also presided over a weak performance on the F1 track in recent years, by Ferrari standards. So he was forced out last year.
“I hope that the client will remain the most important point of reference,” he told reporters earlier this year, the Detroit Free Press reported. “Because if not, it will be a big mistake. Because, I always say, ‘our people, our products, our clients.’ These are the key elements.”
Already the company’s made one big change that Montezemolo was guarding against. He didn’t want to give the world more than about 7,000 cars each year.
Now, the world is about to get more Ferraris. The question is, Will it be enough?
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