Ferrari launched its much-anticipated IPO last month, and since then the stock has declined from a high of $US61 per share to a low of just below $US50.
Not exactly a stunning debut performance, but the markets have been digesting what Ferrari is all about. And now a group of analysts has initiated coverage of the stock, with effectively two main views emerging: Ferrari is a luxury brand and can justify a decent upside; and Ferrari will struggle, at least in the short term, to deliver on its promises to investors.
At Bank of America Merrill Lynch, John Murphy established a “buy” rating and a $US60 target price. In an extensive note, he shows a clear understanding of what drives Ferrari and what had kept the automaker at the top of the luxury car market for decades:
Ferrari is perhaps best known for its strategy of producing/distributing vehicles in limited quantity, which supports a dynamic in which demand is a function of supply. With extensive waiting lists and time involved in the purchase process, supply of Ferrari products is outstripped by demand. This is critical to the company’s growth and inherent value for a number of reasons, as it provides management with significant visibility and control over future sales, bolsters the exclusivity and scarcity value of its vehicles, enhances the luxury status of the company, and allows for considerable pricing power and value resilience.
Evercore ISI is more dubious about Ferrari, with a target price of $US40 and a “sell” rating. The challenge, in the estimate of Evercore’s analysts, is that Ferrari is still a car company, and car companies just can’t deliver the same multiples as true luxury brands that sell clothing, watches, and the like. It isn’t like Ferrari will start building another 7,000 cars in the next few years, far above the roughly 7,000 it now sells annually.
BNP’s Stuart Pearson is also pessimistic. He initiated coverage with an “underperform” rating and a target price of $US46. In his note, he argued that Ferrari should be able to make money, but like Evercore’s team, he doesn’t see the brand performing at the same level as other luxury firms:
To be clear, we are not pessimistic on Ferrari’s earnings potential (11% ’14-19e EPS CAGR). Nor do we doubt its worthiness of a luxury good multiple. However even on estimates that assume Ferrari delivers EBIT margins of >20%, and setting our TP on luxury peer multiples (11x ’16e EBITDA, 24x PE) that include Hermes, LVMH, Prada, Richemont and Harley Davidson, we still see 11% downside to the shares.
But UBS’s Michael Binetti is more optimistic. He joins BAML’s Murphy with a “buy” rating and a $US60 target price. He also highlighted Ferrari’s exclusivity in his note initiating coverage:
We believe Ferrari deserves a luxury brand valuation due to 1) high EBITDA margins and ROIC (far above auto peers, and more in line with global luxury peers) and 2) our view that Ferrari has higher visibility into revenues and cash flows than many of the best global luxury brands (with long average waitlists to buy a new Ferrari and far less car volume decline vs other luxury car brands during past economic downturns) — which help to mitigate downside risks for earnings and the stock.
The bottom line is that Ferrari’s history of being an elusive automotive object of desire is supporting the bull case, while the bears are concerned that Ferrari won’t be able to match the performance of luxury brands that aren’t burdened by building something as complicated and expensive as a high-performance supercar.
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