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ADW Capital: Ferrari Does Not Stand For “Fix It Again Tony” (FIAT)

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Ferrari Does Not Stand For “Fix It Again Tony” (FIAT) by ADW Capital Management

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Investment Opportunity

ADW Capital currently maintains a significant position in Fiat Chrysler Automobiles

  • We believe an investment in Fiat Chrysler represents a once in a lifetime opportunity to own THE premiere global luxury brand – Ferrari – an asset we believe could potentially be worth ~€25+ a share today for approximately ~€15 a share (The trading price of Fiat Chrysler in Milan)
  • Ex-Ferrari, you are getting the 7th Largest Global Automaker with huge insider ownership, the best management team in the industry, and ~€11 of Book Value, for free
  • So why does this opportunity exist?
    - Investors believe that Ferrari is only a car company
    - Investors do not believe Ferrari can increase production
    - Investors believe that Ferrari’s opportunity outside of cars is de minimis
    -Investors view Fiat as an “also-ran” auto company and not an owner of a soon-to-be public Ferrari

Sergio & John: Writing Their Chapter in “The Outsiders” II

Sergio Marchionne

  • When we look at a prospective investment, the first question we ask ourselves is: “Who are the people and are their incentives aligned with us as shareholders?”
  • Sergio Marchionne, FCA’s CEO, is one of the Company’s largest shareholders with a shareholding in the hundreds of millions
  • But beyond being a large shareholder, Sergio has made a career of being a consummate turnaround artist. While Sergio has held a number of “C-Level” posts in his career, he has been a public company CEO for the last seventeen years -- which have been quite generous to shareholders
  • The Chart to the right shows the staggering performance of “Investing with Sergio”

John Elkann

ADW Capital Management Ferrari Fiat

  • The Company is also led by its Chairman, John Elkann, the grandson of Gianni Agnelli
  • Fluent in four languages and having lived all over the world, John is a global thinker
  • In addition to spearheading the turnaround of Fiat, including the recruitment of Sergio Marchionne into his current role, John Elkann was also instrumental in simplifying his family’s holdings, culminating in the creation of Exor in March of 2009, where he now serves as Chairman
  • A serial attender of Berkshire Hathaway annual meetings, John has been laser focused on creating shareholder value and is in the very early innings of establishing himself among the most able of capital allocators
  • Coincidentally, both Buffett and John have built their holding companies around old industry businesses in the midst of turnarounds

The Case for Growth: Why Ferrari Should Increase Units

  • According to Capgemini / RBC’s World Wealth Report, the number of High-Net Worth Individuals (HNWIs) and their aggregate wealth, have both compounded at an average annual rate of ~8.6 percent over roughly the last three decades
  • Fortunately, Ferrari has only increased production by ~2.5 percent per year over the same time period
  • This mismatch in growth has resulted in a “compounding effect” where the growth in HNWI’s and their aggregate wealth have FAR outpaced the growth in Ferraris. While the differential may seem small in any given year, we calculated that global HNWI’s and their wealth grew by almost 10x while Ferrari production only grew by 2x over the same time period

ADW Capital Management Ferrari Fiat

Not surprisingly, this mismatch has resulted in waiting lists for many Ferrari models of ~3 years

The Case for Growth: Why Ferrari Will Increase Units

“Ferrari should always sell one less car than is demanded”

- Sergio Marchionne

  • Sergio has made many public comments implying that he is going to increase production
    - He has also been on record saying, “there comes a point when exclusivity, if it becomes unreachable, is no longer exclusivity, its like you’re reading a fiction novel…lets not fool ourselves, we are in the business of selling cars to people”
  • In Sergio’s May 2014 Analyst Day he laid out what we view as “extremely conservative” economics of scaling production of Ferraris from 7,000 to 10,000 per year. We do not view this as a thought exercise
    - A slide titled Sergio’s Views in the Ferrari Presentation states, “volume could potentially increase to 10,000 cars p.a. as HNW population expands especially in emerging / non-traditional markets”
  • But most importantly, we find the fact that long time Ferrari Chariman, Luca De Montezemolo “quit” while receiving a €15M payment in connection with his “resignation”. This is especially telling since his “resignation” came only one month before the announcement of Ferrari’s planned IPO
  • Luca had publicly opposed raising the production cap for Ferrari and had been described by news media “to be continuously butting heads with Marchionne”

A telling indicator of production increases appeared three days after Luca’s “resignation”, when Ferrari announced a 5 percent production increase

The Case for Growth: Operating Leverage at Its Finest

ADW Capital Management Ferrari Fiat

Gross and EBIT Margins will Converge

  • Over the last 3 years the difference between Gross and EBIT Margins in our Auto Peer Group has been ~12%. Ferrari is ~30%
  • Historically, Ferrari has not had to invest in Sales & Marketing and we don’t expect this to change. As a result, as units scale, the gap between Gross Margins and EBIT Margins will converge to ~10%
  • R&D costs as a percent of Total Sales have historically been in excess of 20%. Furthermore, this percentage is substantially higher when you remove the non-auto sales components. Interestingly, the Company stated in its IPO prospectus that the majority of R&D is related to its F1 team. We don’t believe this number will scale as production grows
  • Additionally, the Company has stated it does not require any additional fixed investment to scale production. Hence, Gross Margins will increase substantially as slack capacity gets utilized

As Ferrari scales production with incremental EBIT Margins of 60 – 80% the delta between Gross Margin and EBIT Margin will narrow significantly

ADW Capital Management Ferrari Fiat

See full presentation below.

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