Interested in buying a new Ferrari for “free” every year? It’s actually quite simple. Just buy 400,000 shares of Ferreri NV stock (RACE) and receive a $0.51 per share annual dividend. This will total about $16,000 more than the entry level Ferreri at $188,000. (However, the stock will cost you $18 million to begin).
Last fall, Italian auto maker Fiat/Chrysler spun off its ultra-high end luxury and race car division. Now publically traded, RACE is rated 4 Star by Morningstar and generated an interest for further research.
Of instant notice is Ferreri’s profitability. RACE generates high ROIC in the upper teens and low twenties, and gross margins of over 50%. As with many luxury goods manufacturers, one feeds the other, with the image of exclusivity driving both. There is almost no other automotive brand that competes with Ferrari as the retail brand plays heavily on its Formula One success. As the global economy continues to expand, the pool of high-net-worth potential customers is expected to grow.
Morningstar’s comments: We calculate that Ferrari's median EBITDA margin during the past 10 years is 25.8%. The only other automotive company that had matching profitability in the same time frame was Porsche at 26.3%. The next closest, BMW, was roughly 10 percentage points lower at a 16.2% EBITDA margin.
On the downside, the cost to stay ahead of the Formula One pack is expensive and a few years of poor racing successes could weigh on RACE brand exclusivity and hence its profitability.
Over the past 10 years, M* calculates revenues grew by 9% annually while volume increased by 4% annually. This demonstrates the pricing power enjoyed by Ferrari. With similar growth, volumes are expected to top 9,000 units in 4 years.
UBS covers Race and recently issued a description of the company as reported on benzinga.com: UBS's Michael Binetti commented on Ferrari's positive outlook, previewing earnings. After positive analysis, Binetti reiterated the automotive company's Buy rating and $50.00 price target. Binetti believed Ferrari's future earnings reports would act as a "thesis stress test" for Ferari. "RACE's car shipments declined by less than 5 percent vs luxury auto peers' shipments down over 30 percent in the same period… and the model is about to be tested [again]," said the UBS analyst.
The analyst was seeing "sluggish spending" in global luxury categories; however, Binetti's recent conversations with Ferrari management instilled confidence in the company's ability to continue its "strong" new car innovation initiatives and positive margin drivers' growth.
"RACE deserves to trade in line with global luxury peers due to high visibility into revs & cash flows as most products are pre-sold to wealthy consumers via long waitlists," stated Binetti.
As a European firm using RACE as its US ADR trading vehicle, Ferrari reports in Euros and investors need to factor in currency exchange risks. M* calculates that for every $0.05 increase or decrease in the Euro:US$ exchange rate will impact RACE Fair Valuation by $2.30. The current Fair Valuation is $52 based on a 1.14:1 ratio. If the euro strengthens to 1.30:1, Fair Valuation could jump to almost $60.
RACE is trading at $45 and a current M* valuation discount of 13%. Nibbling here with an eye towards adding more around $41 would be advisable. You may be able to afford to buy a few more shares of RACE than the cars it produces.
This article first appeared in the Aug issue of Guiding Mast Investments. Thanks for your time and interest. George Fisher