Ferrari Profit, Sales Surge Set To Continue

Ferrari Profit, Sales Surge Set To Continue.

Some Worry That Production “Ceiling” Will Eventually Curb Profit Growth.

“Ferrari cannot just produce as many cars as it wants; it has a brand to protect”

Luxury Status Argument On Hold.

Ferrari celebrated one year of freedom by reporting sharply higher profits for 2016 and predicting more of the same this year as sales climb.

But some analysts fear that after its spinoff last year from Fiat Chrysler Automobiles, the scope for increasing sales will soon reach a ceiling because of fears the unique value of the brand might be diluted by over-supply, while reaching 10,000 a year in volume triggers harsh fuel economy and emissions requirements in the U.S., its biggest market.

In 2016 Ferrari sold 8,014 cars, and plans 8,400 this year. The target for 2019 is 9,000, so 10,000 is still some way off.

Ferrari’s adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) rose to €251 million in the fourth quarter. It forecast this year EBITDA would reach more than €950 million on sales above €3.3 billion.

Investment bank Morgan Stanley has no such reservations, even saying Ferrari’s share price justifies a premium to other luxury goods makers. This contrasts with much recent opinion that sure, Ferrari was a fantastic company compared with its automotive peers, but shouldn’t be seen as valuable as a luxury goods company.

“We believe (Ferrari) deserves a premium to luxury brands due to monobrand status, extremely high scarcity value, stronger pricing power, and less China exposure. It appears the market may be coming to agree with us,” Morgan Stanley analyst Adam Jonas said.

Investment researcher Evercore ISI reckons Ferrari’s forecasts are conservative and wondered if the company’s long-term EBITDA target of €1 billion might be reached this year. 

Ceiling
Josh Arnold, contributor to U.S. investment research website Seeking Alpha, is a fan of Ferrari, but thinks the stock is becoming expensive and worries about what he calls the “production ceiling”.

“Ferrari cannot just produce as many cars as it wants; it has a brand to protect, it has resale values to protect and it simply doesn’t have the manufacturing capacity to continue to build its volumes indefinitely. For those reasons, we are rapidly approaching the production ceiling for Ferrari,” Arnold said

“9,000 has been thrown around as the absolute top and Ferrari is at 8.4k for 2017. That means earnings growth is going to slow materially, and while it won’t stop due to the other levers Ferrari can pull, its growth profile will look very different once it hits the production ceiling, or even when it gets close,” Arnold said.

None of this fazes Morgan Stanley’s Jonas, who predicts sales of 8,444 this year, €3.4 billion in revenues and EBITDA of €967 million.

“We continue to like Ferrari for its stable, defensible qualities and are comfortable with the more modest growth opportunities around items such as volume and pricing. Over the long-term, we believe the market will grow to appreciate the stability in Ferrari’s cash flows and the experiential nature of what Ferrari has to offer its consumers,” he said.

“The now widespread investor consideration of transformational trends of autonomous and share mobility has elevated risk to those involved in producing cars as a means of transportation. In our view, Ferrari is not transportation,” Jonas said.