Wall Street analysts and many value investors see value in Ferrari, amid last week’s plunge, which saw shares take a dive.
Equity research analysts from both UBS and Bank of America Merrill Lynch are enthusiastic about the chances of the new IPO of the iconic race car firm Ferrari, which is trading on the NYSE under the ticker RACE. Both teams of analysts suggest that the current dip below the recent $60+ highs (and the $52 IPO price) makes Ferrari a good buying opportunity, as it is a unique brand with compelling value and few pricing constraints.
In a report published November 16th, Michael Binetti and Janice Ong of UBS note: “Ferrari’s low-volume strategy should support LT scarcity value (we forecast +3% vol. growth in ’16 & ’17, though high net worth individuals’ wealth is forecast to grow +8%)—which should foster pricing power, an increasing mix of high-price/high-margin V12’s, and drive ROIC & EBITDA margin expansion (both are already in line w/global luxury peer group avg) over time. We believe RACE deserves to trade at valuation in line w/the global luxury peer group.”
BAML makes its case for Ferrari
In their November 15th report, John Murphy and the BAML team offer “five fundamental reasons” to buy Ferrari:
“1) Distribution of limited quantity supports vehicle scarcity value, exclusivity of a “true luxury” brand, and demand over time.
2) Inherently defensive with financial resilience through economic downturns and control of future volumes.
3) Long record of F-1 success.
4) Upside levers to revenue/earnings growth – price, mix, expansion of adjacent businesses, and cost efficiencies.
5) Capital allocation will drive value to shareholders.”
The BAML analysts note they are initiating coverage of Ferrari with a Buy rating and price target of $60, based on their models of 4X 2016e EV/Sales. Murphy et al argue that Ferrari’s brand value is uniquely positioned in the auto industry and the luxury goods market. They point out the the “key to long-term success” is to maintain its premium brand status at all cost.
Given that Ferrari is currently trading at an EV/Sales of 3.4x the BAML team’s 2016 estimate, they say there is an opportunity as that is slightly below the average of 3.7x for a number of luxury goods companies in RACE’s peer group. Although there is no direct comparison to Ferrari, Murphy et al.claim a forward multiple in line with select luxury goods companies is deserved, as the premium for a 70+ year history is accompanied by a discount for the capital intensity of Ferrari’s business compare to its luxury goods peers.
The BAML analysts also mention that their DCF indicates the fair value of Ferrari is actually in the high $70 range.
UBS also calls Ferrari a Buy
UBS analysts Binetti and Ong come up with an identical $60 price target for Ferrari, is 12x their EBITDA estimates for year-end 2017 (the average for Luxury is 12x). Their longer term base case models show €1.03B of EBITDA in 2019 based on +3% total rev and +8.5% EBITDA growth (2015E – 2019E CAGR). They also assume unit sales volumes increase to 8.8k/yr (+3.5% CAGR vs 7.7k in 2015E), +€100m cost savings/yr, and a 33% mix of V12’s (compared to 19% currently).
The UBS upside case would see €1.14B of EBITDA by 2019 (+11% CAGR) increased by: 1) Customization adding 20% to average prices (compared to 15% today); 2) +3% price increases; 3) higher margins on V12’s vs V8’s. Note that the upside case doesn’t include new supercars, a Dino re-launch or brand extensions.
According to recent data from a UBS Evidence Lab survey of global Ferrari dealers: “1) Brand power = key reason to buy Ferraris over competitors (w/dealers commonly citing brand loyalty, status symbol, and the Ferrari “community” as purchase drivers); 2) Solid new customer indications of interest (60% of dealers reported increase in qualified inquiries vs LY); 3) Strong demand indicators for new 488 Spider (87% of dealers anticipate stronger-than-expected customer interest); 4) Strong used car values (60% of dealers cite increase in the number of used Ferraris and 40% reported stronger pricing YOY).”