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Ferrari IPO (Attractively Priced): The Best Way To Own Ferrari.

Oct. 18, 2015 3:47 AM ETRACE, STLA, GM, F
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Ferrari (RACE), one of the world's leading luxury brands, is offering 17,175,000 common shares in the price range of $48 and $52 per share. At the midpoint of the price range, the company is demanding a valuation of $9.4 billion. The offer is a part of a series of transactions that ultimately will result in complete separation of Ferrari from Fiat Chrysler Automobiles N.V. (FCAU).

Business:

The company is a leading luxury car manufacturer. The company sells nine models, including seven sports cars and two GT cars. The company sells its cars through a network of 182 authorized dealers in over 60 markets worldwide. The company markets and promotes its cars through the racing activities of its Formula 1 racing team, Scuderia Ferrari, which is the most successful team in Formula 1 history. Formula 1 World Championship, with approximately 425 million television viewers annually, is one of the most watched annual sports series in the world.

The company also earns a part of its revenue through:

  1. Sale of Ferrari branded luxury lifestyle merchandise through its stores (owned and franchised) and website.
  2. Brand licensing and associated sales.
  3. Engines sale.

Brand strategy:

The company maintains delivery wait-times for its cars through a low volume production strategy. The company believes that this strategy leads to a reputation of exclusivity and scarcity among purchasers of its cars. This strategy has allowed the company to place Ferrier as a scarcely available super luxury car, which create enthusiasm among owners and potential buyers. Due to its brand strategy, its shipments have shown much less volatility (as compared to its competitors) during economic downturns (see the chart below).

(Source: IPO prospectus)

Financials:

For the six months ended June 30, 2015, the company earns 72.7% of its revenue from sale of cars and spare parts, 8.7% from engines sale, 15.3% from brand licensing and associated sales. In FY 2014, the company earns 70.4% of its revenue from sale of cars and spare parts, 11.3% from engines sale, 15.1% from brand licensing and associated sales.

During 2010 to 2014, the company's revenues showed a compound annual growth rate (OTC:CAGR) of 10.8%, and its net profit improved at CAGR of 7%.

Key positives:

  • Brand value:

Ferrari is one of the most iconic and recognized brand in the world. Due to its design, luxury, exclusivity, power and performance, Ferrari generates high brand recall. Proof of high brand recall is the facts that in 2014 approximately 60 percent of the new Ferrari cars were sold to Ferrari owners and 34 percent of Ferrari owners own more than one Ferrari car. The proof of iconic status of the brand is the fact that vintage Ferraris are among the most sought after cars in the collector market, with nine Ferraris ranking in the top 10 most valuable cars ever sold in public auctions.

  • Global spread of the market:

The rapid growth in the developing countries during the last two decades has reduced the company dependence on the markets like Italy, Germany and the United States. In 1993, 90 percent of the company's cars were sold in Italy, Germany and the United States. Today, however, these markets represent less than half of the company's unit shipments (see the table below). The global spread of the markets not only allows the company to take full advantage of its brand recognition, but also reduces the negative effect of any regional slowdown.

(Source: IPO prospectus)

  • Strong historical performance:

The company possesses an exceptional financial and operational track record. During the last ten years, the company has recorded shipment growth of 34 percent. From 2005 to 2014, the company achieved a CAGR of seven percent in net revenue, and its 2014 Adjusted EBITDA margin of 25.1 percent represented an increase of 6.9 percentage points over 2005. The above data shows the company's margins and revenue grows faster than its shipment growth, which means one can expect a decent margin and revenue expansion in the coming years as the company has planned to increase its shipments to 9000 units by FY 2019 from just over 7000 in the current financial year.

  • Racing heritage:

The company's Formula 1 racing team, Scuderia Ferrari, is the most successful team in Formula 1 history. The team's success in Formula 1 World Championships provides the company an unmatched platform to promote its brand and technological prowess.

  • Active research and development approach:

The company is an R&D driven company. It spends over 19% of its revenue on research and development of its cars, which is way above the industry benchmarks. This kind of R&D spending looks way to high, but it is the key factor behind the success of the company's cars. This spending allows the company to constantly outperform its competitors on four key metrics: design, luxury, power, and performance. The High R&D expenditure also allows the company to launch at least one new model every year. New models normally attract more customer attention and generate higher margins than the older models.

  • Technological expertise:

Since the beginning, the company has been focusing on the development of the leading-edge technology. Today the company holds numerous proprietary technologies that make its cars the most powerful cars in the world. For example, its latest V12 engines' output ranges from 660 hp (in the FF), to 740 hp (in the F12), and up to 800 hp (in the LaFerrari); there are no other carmakers which currently boast such specific high power ratios. After IPO, as an independent entity, the company may well expand its revenue by offering its products (engines, powertrain), etc. to other companies (the company is producing engines for Fiat Chrysler's Maserati since 2003).

Key negatives:

  • Recent Formula 1 performance:

The company's marketing and promotion efforts are focused on its racing activities, in particular Scuderia Ferrari's participation in the Formula 1 World Championship. Even though Scuderia Ferrari is the most successful team in Formula 1 history, the team hasn't won any Formula 1 world title during the last seven years. This situation, if continues, can lead to decline in Ferrari's brand reputation.

  • Limited shipment growth:

The company's growth, to a significant extent, depends on the growth of the shipments of its cars. Due to its brand strategy, the company can't increase it sales beyond a limit as any such attempt will hurt the brand image of Ferrari. This means one should not expect any exceptional growth in the shipments in the coming times.

Though the company can get more value from its brand by entering other price segments of the car market, the brand strategy will restrict the company from offering low price cars as this will also hurt the brand image.

Valuation:

After the IPO, the valuation of the company will stand at about $9.5 billion (considering 188,921,600 shares outstanding and $50 per share). Following below is the company's assumed future performance to check where this valuation stands.

Assuming that the company gradually increase its shipments to reach 9000 units per annum by 2019 and financially performs in line with its historical performance.

  • Its shipments grow at CAGR of 5.5% from FY 2015 to FY 2019.
  • Its revenue grows at CAGR of 9.5% from FY 2015 to FY 2019.
  • Its EBITDA margins improve by 1 percentage point each year.
  • The rate of income tax 33%.
  • Amortization and depreciation increased by 9% per annum (YoY).
  • No unexpected onetime gains or losses.
  • Shares outstanding remain the same.
  • Everything else remains same.

Above data shows that at $50 per share the company is available at two year forward PE of 22.4 (provided that the company performs in line with its historical performance and improve its shipments as per target).

The valuation may look expensive when compared to the companies like GM (GM), Ford (F), etc., but considering the growth oriented, research based, recession-resistant nature of Ferrari's business, the valuation looks attractive and holds a decent upside potential.

Summary:

Over the years, Ferrari has evolved beyond luxury cars. Today Ferrari is a premium lifestyle brand, which symbolizes luxury. The company holds multiple growth opportunities (car sales, brand licensing, and product sales). The company may not show much shipment growth in FY 2015, but beyond that the shipments should gradually improve to reach 9000 by 2019 (as per the company's target). At the offered price range, the company is attractively priced.

Disclaimer: Investments in the stock markets carry significant risk, stock prices can go up or down without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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