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Investors Scramble To Rerate Ferrari As Electric Turmoil Looms

Investors Scramble To Rerate Ferrari As Electric Turmoil Looms.

“A semi’s guy who did his thesis on quantum quarks and has hundreds of patents to his name running Ferrari? We live in extraordinary times”

After Ferrari, legendary maker of exotic sports cars, finally appointed a new leader, investors briefly breathed a sigh of relief, before dumping the shares citing worries about how much money would have to be spent turning screaming extravert gas guzzlers into eerily silent, modest electric ones.

Investors were thinking again about the sky-high luxury-goods type valuation of its shares, and one auto expert suggested a more realistic price for the shares would be closer to €60 not the current €167.   

The appointment of semiconductor expert Benedetto Vigna in June after 6 leaderless months was greeted with relief, even though his skills from years of working in the microelectronics sector shocked investors expecting either a petrol head, or a master of the luxury universe. The later was seen as likely given Ferrari now is valued on stock markets as a luxury goods maker like Hermes International or LVMH. Indeed, in the days before the announcement there was speculation Ferrari would merge with Italian fashion brand Armani.

Ferrari’s shares have always been valued much higher than lesser mortals in automotive manufacturing so when times get tough, the share price is very vulnerable as investors see challenges to its unusually strong profitability. 

After the initial surprise, the reaction to new CEO Vigna was positive. Morgan Stanley analyst Adam Jonas put it this way.

“A semi’s guy who did his thesis on quantum quarks and has hundreds of patents to his name running Ferrari? We live in extraordinary times,” Jonas said, before adding that the choice of CEO provided a clue to the level of buy-in from the Ferrari board to transform the company into a electric/connected/software defined car.

Nervous investors

But the shares came under pressure when investors became nervous about Ferrari as it embraces expensive, risky and necessary move to electric cars and away from internal combustion engines.

Leading a new, negative approach to Ferrari was Goldman Sachs autos analyst George Galliers who switched his investment recommendation to “sell” from “buy”.

“We downgrade Ferrari from Buy to Sell for 4 key reasons,” Galliers said.

  • Galliers applauded Ferrari’s plans to bring forward its first all-electric sports to 2025 and the appointment of a CEO with a technology background but worried that this would bring big pressure on capital spending. He estimated that this would rise to an average €796 million ($950 million) a year between 2021 and 2030 from previous estimates of €754 million.
  • Ferrari’s recent share price advance had been based on positive profit growth expectations, but the recent profit delay warning put a dampener on likely improvements.
  • The broader global auto industry was in the midst of making big production and therefore sales improvements which Ferrari would not be a part of.
  • Ferrari’s ability to raise prices was much lower than the automotive sector generally.   

“We expect the broader auto industry to benefit over the next 12-18 months from a sequential improvement in global production, as a result of easing of semi-conductor shortages, improving end markets and the need to re-stock. Sector-relative, we do not expect Ferrari to be a notable beneficiary of this development,” Galliers said in a report.

Last month Ferrari said its targeted adjusted core earnings improvement would be delayed for a year. The target would rise to between €1.8 to €2 billion in 2023 ($2.2 to $2.4 billion), not 2022. It still expected to reach the top end of its €1.45 to €1.5 billion forecast for 2021.

In the first quarter, earnings rose slightly to €376 million ($450 million) compared with the same period last year while sales rose to 2,771.

In 2020, Ferrari earnings before interest, tax, depreciation and amortization (EBITDA) fell 10% to €1.14 billion ($1.4 billion) compared with 2019. Sales slid back under 10,000 in 2020, after the factory at Maranello was shut for 7 weeks because of the coronavirus. In 2019, Ferrari sold 10,131 vehicles, up 9.5% on the previous year.

€60 not €167
Center for Automotive Research (CAR) director Professor Ferdinand Dudenhoeffer said Ferrari, currently valued on stock markets at about €32 billion ($38 billion), is clearly hugely overvalued. The shares closed trading in Europe Thursday at €167.45. Dudenhoeffer said a more realistic value would be €60.  CAR is based in Duisberg, Germany.

“If one were to pay 10% interest on the net present value of €32 billion, Ferrari would have to expect a profit of €3.2 billion ($3.8 billion). In 2020 the EBIT profit, i.e. before interest and taxes, was just €700 million ($840 million). The best profit year was 2019 with an EBIT of €917 million ($1.1 billion),” Dudenhoeffer said

“According to this calculation, Ferrari’s share price would be closer to €60 euros instead of €167. I do not see the prospect of increasing profits in this volume in the next 15 years. So with the change in management, reality has returned in my opinion and the high stock market valuation of Ferrari has been adjusted. If interest rates will come back in next years from zero-interest to an adequate market interest rate, Ferrari shares would further decrease,” he said.

Ferrari shares have been volatile since the previous CEO Louis Camilleri resigned suddenly in December citing personal reasons. The shares peaked at about €190 then and slid 18% to near €155 in early March. The shares then erratically moved up to €180 just before the news of Vigna’s appointment and have subsequently slid nearly 7%. Cynics might link Camilleri’s unexpected departure to remarks he made a month before leaving that Ferrari would never become an all-electric carmaker and ruled out it even moving to 50% electric in his lifetime. Acting CEO John Elkann, Exor chairman from the Agnelli family which controls Ferrari, said in April the first electric Ferrari would appear in 2025.

Vigna starts work at Ferrari in September.

After news of his appointment, investment researcher Jefferies analyst Philippe Houchois said the surprise felt by investors reflected the difficulty finding a suitable candidate.

“The appointment is highly unexpected and, in our view, reflects the need to “re-invent” Ferrari and the difficulty of securing candidates willing to take on the task. Having said that, one should not underestimate the strategic thinking of Ferrari and Exor Chairman John Elkann,” Houchois said.

Reuters Breaking Views columnist said Vigna’s semiconductor expertise and innovation credentials make him well-placed to help Ferrari move away from combustion engines.   

Ferrari will launch its first SUV, the Purosangue, next year.


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