Is There Any Upside Left To Ferrari?

| About: Ferrari N.V. (RACE)

Summary

Ferrari has seen over 100% return over the last year.

Economic headwinds spell trouble for the automotive industry.

Valuations show significant downside in Ferrari.

With the turmoil of slowing auto sales weighing down on the auto manufacturing industry investors will begin to question the 107% one year return of Ferrari (NYSE: RACE), while the sector as a whole has only seen a 13.83% one year return. Even in the last 3 months RACE has returned 31.79% compared to the sector return of -3.35%. RACE is also trading much higher than analysts' valuations. It is currently over 14% Morningstar's "Consider Sell" price of 74.25. It is currently trading 10% over Yahoo! Finance very bullish 1-year est of 77.76. Investors must begin to wonder is there much room left in this bullish run, and if so just how much room is there before the industry and profit taking begins to knock on the resistance.

MULTIPLES:

When looking at relative valuations of the industry it is easy to see that RACE is trading at a very high multiple.

RACE P/E Multiple(Forward)

Sector P/E Multiple(Forward)

28.18

11.27

Mean Earnings (2.85)

Mean Earnings (2.85)

$80.31

$32.12

From this simple multiple we can see that RACE is already overvalued by 150%. This is a very high overvaluation even if this were a tech company or biotech company that ordinarily trade at much higher multiples.

The P/B multiple shows a very similar story.

RACE P/B Multiple

Sector P/B Multiple

30.99

1.84

From this multiple we can see that RACE is overvalued by over 1,500%. RACE current P/B is extremely high and is not justified in being that high.

Ferrari's IPO:

Another interesting thing investors must consider is why exactly did Ferrari go public? Fiat (NYSE: FCAU) owned 90% of RACE at the time it decided to separate. At the time that separation in 2015 Ferrari revenue made up 2.5% of FCAU revenue stream. 2.5% does not justify the 16.08 billion market cap of Ferrari compared to 16.35 billion market cap that FCAU has. For a company that only made up of 2.5% of revenue to almost match that of its previous owner does not make sense. Another thing to consider is the fact that FCAU was making a strategic move by getting rid of this company. The year following the separation FCAU net income improved over 360%. This should draw serious concerns that the management of FCAU saw a trend or shift and seized upon it by offloading RACE to free up capital. This shows you that FCAU saw opportunities that were more valuable than continuing operations with RACE.

INDUSTRY:

Another concerning factor in RACE bullish run is the very bearish outlook of the auto sector. When considering the pre-tax cut of China auto sales one can see that China sales are likely to decline. This is very alarming considering the growth in China is what kept the bears at bay in 2016. Without China auto sales in 2016 would have fallen pretty drastically in many regions. Another alarming fact is that unsold new cars are piling up into highs not seen since 2004. JD Power estimated that dealers had 4.1 million vehicles left on their lots at the end of the 1st quarter which is up from 3.8 million from a year ago and up from 3.6 million two years ago. With the pile ups defaulting loans are on the rise as buying power falls. To compensate, the industry is expanding the length of car loans. This adds significant risk to the auto industry. These are just a few key statistics that show the tough environment that Ferrari is going to face going forward. On an more qualitative note, auto manufacturers are having to become more creative. With major tech companies like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) becoming more and more involved in the auto industry and major innovative companies like Tesla (NASDAQ:TSLA) are changing the auto industry. RACE has been left behind in the race for innovation. This will prove devastating in the long-term outlook for Ferrari as they attempt to differentiate themselves while lacking new technology.

DCF:

When running a DCF you can also see that RACE is also overvalued. There are several assumptions that need to be made.

A FCF value of$746 million was used A WACC value of 8.1% was used which is on the conservative side from a range of 8.1%-9.5% A growth rate of 4% for 4 years is assumed. A growth rate this low is given due to the very small market that RACE sells to and the deteriorating auto industry outlook. A terminal growth rate of 2% is assumed which is relatively optimistic for an industry like this

Growth Rate

4%

4%

4%

4%

2%(TERMINAL)

DCF

$735.02

$707.15

$680.32

$654.52

$10,944.46

Enterprise Value

$13,721.47

Shares Outstanding

188.95 million

Price Per Share

$72.62

Downside

-15%

From this DCF we can see that RACE is still severely overvalued. This DCF was done using optimistic outlooks as well. When using a WACC at the higher end of the calculated range you find a downside of over 30%.

Conclusion:

Given the very low multiple and DCF valuations it is difficult to see any future growth or return from RACE. The industry outlook is not promising and given the saturated economy that RACE is operating in, there is little room for any real meaningful growth in its revenues and value. The bullish run of RACE could be coming to an end as investors begin to take profits and invest in more attractive industries.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Auto Manufacturers - Major, Italy
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