Ferrari Profits Race, But Investors Worry About Brand Damage

Ferrari Profits Race, But Investors Worry About Brand Damage.

“Ferrari’s long term earnings power is under-appreciated given significant pricing power, under-penetrated markets and upside to volumes”

Investors in normal, run-of-the-mill car manufacturers would be hard pressed to find anything negative to say about results which showed revenues up 13% and profits growing even faster.

But this is Italian luxury sports-car maker Ferrari, and its high share priced is based on its perceived exclusivity.  So after the initial euphoria generated by its first quarter EBITDA (earnings before interest, tax, depreciation and amortization) profits 14% higher at 311 million euros ($349 million) compared with the same period last year as sales advanced 13% to 940 million euros ($1.1 billion), investors started to worry if this was too good to be true.

“Is Ferrari growing too fast,” asked Bernstein Research analyst Max Warburton.

Ferrari’s first quarter sales increase was down to the success of its cheapest product, the Portofino, (from $214,533, 3.9 liter, 590 hp twin-turbo V8), while sales in China took a mighty 79% leap to 328 as buyers bought ahead of tightening emissions regulations. Sales of the 488 Pista Spider ($350,000) start this quarter.

Ferrari announced at an investors’ meeting last September that it will launch an SUV, called the Purosangue, by 2022. The Monza SP1 ($1.75 million) starts deliveries in the fourth quarter. Between 2019 and 2002, there will be 15 new model launches. 60% of all cars sold by 2022 will be gasoline-electric hybrid, the first of which will be unveiled at the end of this month.

Ferrari stuck with its financial targets for the year, with EBITDA expected around 10% higher at between 1.2 billion to 1.25 billion euros ($1.35 billion to $1.4 billion). The long-term business plan calls for EBITDA of more than 1.3 billion euros ($1.5 billion) by 2020. 

Investment bank UBS reckons Ferrari is doing everything just about right.

Underappreciated
“We believe Ferrari’s long term earnings power is under-appreciated given significant pricing power, under-penetrated markets and upside to volumes,” said UBS analyst Susy Tibaldi.

“Importantly, management stressed that the order book remains extremely strong, suggesting higher volumes are not impacting brand equity,” Tibaldi said.

Tibaldi thinks Ferrari’s forecasts are conservative.

Investment bank Morgan Stanley raised its target share price to $160 from $140, saying many of its reservations about the company’s future in an electric world were being addressed.

According to Bloomberg data, the Ferrari share price on Thursday was $140.46.

Investment researcher Evercore ISI cautioned that during 2019 nearly 50% of Ferrari’s markets face uncertainty including Brexit, possible U.S. tariff problems, and big uncertainties in China, but compared with the more mundane end of the market, earnings and the share price are better protected.

Bernstein Research’s Warburton said Ferrari must beware of growing too fast, but retained his “market perform” rating on the shares.

“Ferrari needs to be careful about how fast and how far it pushes sales of its lower-end cars. Ferrari’s valuation multiple is almost dangerously rich – it will need evidence of earnings growth delivered by mix and price, rather than volume, to prove durable,” Warburton said.   

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