Ferrari; A Successful Auto Maker, Or A Mediocre Luxury Brand?

Ferrari; A Successful Auto Maker, Or A Mediocre Luxury Brand?

Profits Up, And Growing; Sales Too.

“This debate should go on until an (economic) downturn where it will be tested, hence our caution”

Ferrari is making fat profits and expects to make more, but investors can’t decide whether the company is a successful auto maker, or a lack-lustre luxury brand.

In the third quarter of its first year following its spin-off from Fiat Chrysler Automobiles, Ferrari net profit rose to €113 million from €94 million in the same month last year. It forecast full-year gross operating profit would rise 6.3 per cent to €850 million, up from a previous forecast of €800 million, and it would sell a record 8,000 cars.

“We are still trying to get our heads around the Ferrari stock. On paper it’s a business with few peers. Volumes are limited by management’s willingness to fulfil orders, which has generally meant supply has been lower than demand. In that sense it’s not a regular auto company, but by the same token it doesn’t appear to be facing the same challenges as other luxury goods companies,” said Citi Research analyst Michael Tyndall, in a report published before Ferrari’s latest financial report.

After the results, investment researcher Evercore ISI continued the theme, saying Ferrari is yet to convince investors that it is a “special” investment.

“This debate should go on until an (economic) downturn where it will be tested, hence our caution,” said Evercore ISI analyst George Galliers, who upgraded his investment recommendation to “hold”.

LaFerrari Aperta
Galliers said he liked Ferrari’s use of special edition/limited edition models, like the recent announcement it would make 350 LaFerrari Apertas, and what he called the “semi-defensive” nature of the stock under which it is relatively immune from monthly sales figures and conflicting signals coming out of China.

Galliers listed 3 reasons persuading investors not to buy the shares.

• Lack of earnings growth, which doesn’t compare with luxury brands like Hermes, Kering, LVMH and Monder.
• Limited evidence of pricing power.
• No obvious signs that costs can come down

And then there is the burgeoning competition.

“While 20 years ago the competition for Ferrari was limited, today it is significant with McLaren, Porsche and Bentley, to name a few, competing at similar price points. We don’t see investment coming down at any of these peers or across the auto industry. Therefore it is difficult to see why Ferrari will prove the exception,” Galliers said.

Citi Research’s Tyndall was also concerned about long-term threats to demand for Ferraris which might be threatened by changing demographics and fashion.

“Ageing buyers pose a long term question mark on demand. Historical data shows Ferrari has shrugged off most economic downturns. We have a concern surrounding the long-term appeal of sports cars. In the U.S. sales of high-end sports cars are down 12 per cent year to date, which appears to be related to ageing baby-boomers. To counter this, Porsche led the way into sporty SUVs and stable-mates Bentley and Lamborghini are following. Ferrari has so far resisted, but might it be left behind,” he said.