Hey Everyone, I have recently analysed Ferrari and wanted to share my analysis on the company. I apologise to anyone wanting a quick read but this is a long post because I think it's necessary to share my thought process that lead to my conclusion for this company. Please don't use this post as a reason to invest in Ferrari but rather see how I break down and analyse companies and maybe you can pick up a tip or two along the way! This post will also break down how I calculate the intrinsic value of Ferrari. This analysis is broken down into four sections:
- History/Overview of the business
- Business Segments
- Financial Highlights
- My Thoughts and Company Valuation
History/Overview of the Business:
Ferrari is named after their founder Enzo Ferrari. An Alfa Romeo driver since 1924, Enzo Ferrari founded his own racing team, Scuderia Ferrari, in Modena in 1929 initially to race Alfa Romeo cars. In 1939 he set up his own company, initially called Auto Avio Costruzioni. In late 1943, Enzo Ferrari moved his headquarters from Modena to Maranello, which remains Ferrari's headquarters to this day.
Ferrari is among the world’s leading luxury brands, focused on the design, engineering, production and sale of the world’s most recognisable luxury performance sports cars. Their brand symbolizes exclusivity, innovation, state-of-the-art sporting performance and Italian design and engineering heritage. The name and history and the image enjoyed by Ferrari cars are closely associated with their Formula 1 racing team, Scuderia Ferrari, the most successful racing team in the history of Formula 1. From the inaugural year of Formula 1 in 1950 through the present, Scuderia Ferrari has won 242 Grand Prix races, 16 Constructors’ World Titles and 15 Drivers’ World titles. Ferrari are the only team which has taken part in all the editions of the Championship, racing in more than 1,000 Formula 1 Grand Prix races.
Ferrari's product offering comprises four main pillars: Range, Special Series, Icona and Supercar. Ferrari targets end clients seeking high performance cars with distinctive design and state-of-the-art technology. Their target end clients can be divided into two main categories: on the one hand, the “Sports Car Driver”, a client looking for an elegant and understated design, who likes driving their car in a variety of locations and conditions, alone or with passengers, and who use their Ferrari for longer journeys, on the other hand, the “Pilot”, a client looking for a high performing and extreme sports car, who intend to drive their car on track and on challenging roads, and who are looking for an exciting driving experience.
Ferrari has a strategy of maintaining low volumes compared to demand, as well as to the higher number of models in our product portfolio and our more frequent launches compared to our competitors. We are not focused on market share as a performance metric. Instead, we deliberately manage our supply relative to demand, to defend and promote our brand exclusivity and premium pricing. Competition among similarly positioned luxury performance cars is also driven by price and total cost of ownership. Resilience of the car value after a period of ownership is an important competitive dimension among similarly positioned luxury cars, because higher resilience decreases the total cost of ownership and promotes repeat purchases: this is a strong competitive advantage of Ferrari cars.
Business Segments:
Design:
The company has a Ferrari Design Centre, which is an in-house design department, with the objective of improving control over the entire design process and ensuring long-term continuity of the Ferrari style. A guiding principle of the Ferrari style is that each new model represents a clear departure from prior models and introduces new and distinctive aesthetic elements, delivering constant innovation within the furrow of tradition. Their designers, modelers and engineers work together to create car bodies that incorporate the most innovative aerodynamic solutions within the elegant and powerful lines typical of Ferrari cars.
Ferrari Classiche:
The Ferrari Classiche department support Ferrari customers in managing the historic Ferrari vehicles (over 20 years from their production) with the objective of keeping as many of these classic cars on the road as possible. Services include the certification of the authenticity of classic Ferrari cars and vehicles of particular historical relevance, the management of Ferrari restoration and repair activities, as well as the management of Ferrari spare parts, including when these are no longer available on the market. The authenticity of the car with respect to the initial specifications is checked via a technical inspection and benefits from a comprehensive archive containing drawings of each of the individual chassis and details of historical components. Based on the evidence gathered during the inspection, the car is then presented to an expert committee, chaired by the founder’s son Pierro Ferrari, for the certification.
We view the surviving Ferrari vehicles of historical value as the tangible legacy and incarnation of our brand. The Ferrari classiche department also supports and encourages the direct participation of clients in strategic historical events.
Sales Segments:
Ferrari sells their cars exclusively through a network of authorised dealers. Ferrari also supplies parts for current and older models of Ferrari to our authorised dealer network. In addition, substitution of spare parts during the life of the car, sales are driven by clients’ demand for parts to customise their parts and maximise performance, particularly after a change in ownership, we well as parts required to compete in the Ferrari challenge and other client races. They also supply parts to Ferrari models currently out of production, with stocks dating back to 1995. The stock of parts for even older models is currently owned and managed by a third party which in some cases also manufactures out-of-stock parts based on our designs. The sale of parts is a profitable component of our product mix and is expected to benefit from the increase in the number of Ferrari cars in circulation.
Ferrari has also been selling engines for Maserati since 2003. They also earn revenue from sponsorships from F1 racing, selling apparel merchandise, and leasing out their Mugello racetrack.
Driving Events, Circuit and Museum:
Ferrari hosts a wide range of driving events for owners and prospective owners. Ferrari also has their own Mugello racetrack along with two museums. The Museo Enzo Ferrari (MEF) is built around the house in which Enzo Ferrari was born in 1898. The MEF tells the story of Enzo Ferrari as a young boy discovering the irresistible allure of the world of motor racing, his career as a driver in the 1920s, as the driving force behind the Scuderia Ferrari in the 1930s, and then as Ferrari, the Constructor, from 1947 onwards. The Ferrari Museum Maranello invites visitors to experience the Prancing Horse dream first hand, offering them a journey through the Group’s history, values and automotive world.
Financial Highlights:
Net Revenues:
In Thousands
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 | |
|---|---|---|---|---|---|---|---|---|
| Cars and Spare Parts | $4,341,482 | 3,573,119 | 2,835,170 | 2,925,721 | 2,535,245 | 2,455,955 | 2,180,000 | 2,080,000 |
| Sponsorship, commercial, and brand | $478,499 | 430,579 | 390,002 | 538,238 | 505,701 | 494,082 | 488,000 | 441,000 |
| Engines | $155,342 | 189,432 | 150,655 | 198,308 | 284,546 | 373,313 | 338,000 | 219,000 |
| Other | $119,931 | 77,764 | 83,963 | 104,348 | 94,829 | 93,540 | 99,000 | 114,000 |
| Total | $5,095,254 | 4,270,894 | 3,459,790 | 3,766,615 | 3,420,321 | 3,416,890 | 3,105,000 | 2,854,000 |
ICE (Internal Combustion Engine) and Hybrid total unit shipments:
| 2022 | 2021 | 2020 | |
|---|---|---|---|
| ICE | 78% | 85% | 98% |
| Hybrid | 22% | 15% | 2% |
Annual Shipment Volume:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| 13,221 | 11,155 | 9,119 | 10,131 | 9,251 | 8,398 | 8,014 | 7,664 |
Cars Sold To Existing Owners as a percentage of total vehicles sold:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| 66% | 59% | 65% | 70% | 65% | 65% | 60% | 59.5% |
Owners With More Than One Ferrari:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| 38% | 32% | 32% | 41% | 41% | 32% | 36% | 34% |
Net Tangible Assets:
in thousands
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| $2,342,020 | 1,936,843 | 1,448,775 | 1,495,799 | 1,198,006 | 917,907 | 637,378 | 175,919 |
Return on Net Tangible Assets:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| 40.1% | 43% | 42% | 46% | 65% | 58% | 62% | 164% |
Return On Total Assets:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| 15.8% | 15.6% | 10.4% | 16.8% | 17% | 18.7% | 15.4% | 11.4% |
Profit Before Taxes/Revenue Margins:
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| 23.1% | 24.4% | 19.3% | 23.2% | 23.4% | 21.8% | 18.27% | 15.2% |
Free Cash Flow (in thousands)
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| $1,013,932 | 912,988 | 450,184 | 795,020 | 615,097 | 468,359 | 825,838 | 544,202 |
Past Free Cash Flow Growth Rate
| 7-year | 5-year | 3-year | 1-year |
|---|---|---|---|
| 9% | 17% | 8% | 11% |
My thoughts:
There are a lot of things I like about this company. I am going to go over some qualitative reasons and then go over quantitative reasons on why I like this company and then proceed to company valuation.
Qualitative reasons:
- Ferrari models each have a unique design meaning that each model is completely seperate from their prior models. This means that if you purchase a Ferrari, the car will not depreciate in value and older Ferrari models will hold heritage value. This is unique among car manufacturers. This is evident as we can see that more than 50% of Ferrari cars have been sold to existing owners. Most Ferrari owners end up becoming repeat purchasers and stay very loyal to the brand.
- I had some fears about regulations in the auto industry pushing car manufacturers away from ICE engines. However, this doesn't seem to impact Ferrari as Hybrid models represented 22% of total shipment volume in 2022, up from 2% in 2020. Customers are still happy to purchase a Ferrari since 2022 had their highest shipment volumes in history.
- Ferrari's management incentives are aligned with shareholders and is focused on the long-term. FERRARI has a loyalty voting program which is intended to reward shareholders for maintaining long-term share ownership by granting initial shareholders and persons holding their common shares continuously for at least three years the option to elect to receive special voting shares. Special voting shares cannot be traded and, if common shares participating in the loyalty program are sold they must be deregistered from the loyalty register and any corresponding special voting shares transferred to us for no consideration. Exor and Pierro Ferrari participate in the company’s loyalty voting program and, therefore, effectively hold two votes for each of the common shares they hold. Pierro Ferrari holds a 10% interest in the company.
- As more Ferrari's cars come in circulation, the Ferrari's spare parts segment will continue to grow revenue as the years go on. This is because more clients will demand to have their cars optimised.
- Worldwide car sales was around 67.2 million in 2022. Ferrari unit shipment was 13,221. This brand is very exclusive and holds scarcity value.
- Ferrari engages in R&D for their Formula 1 racing activities. While Ferrari develops these technologies for use in their Formula 1 cars, they seek to transfer these technologies and components to models in their current and future product portfolio.
Quantitative Reasons:
- Ferrari's revenue has increased every year since it went public
- Return on Net Tangible Assets have consistently been above 40% which is fantastic and this is with Net Tangible Assets growing every year!
- Return on Total Assets have remained at double digits in every year.
- Margins have increased since 2015
Company Valuation:
Ferrari's ambition is to launch 15 new models between 2023-2026 and I don't have much doubt they can achieve this since Ferrari has consistently delivered on their past ambitions. I have calculated the intrinsic value of Ferrari by applying the discounted cash flow calculator. Free Cash Flow is calculated by taking cash flow from operations and subtract it by maintenance capital expenditures.
- I will not use a 17% growth rate since the past 5-year 17% growth was from 2017 (Free cash Flow was second lowest at $468,359) and it is also too optimistic.
- Using a growth rate of 9-12% with a 10% discount rate, my buy price ranges from $150 to $195. I will purchase the company if price is slightly above this range because I am confident in the company's competitive position and management.
I hope you enjoyed the analysis!
Leave a Reply