Interactive Investor

How to own a $10bn Ferrari

21st October 2015 13:28

Lee Wild from interactive investor

Ask any young boy what their favourite car is and there's a better-than-evens chance they'll say Ferrari. It doesn’t change much the older they get. Some might go down the Bentley, or Lamborghini route, but the masses love a flaming red Ferrari, old or new. They'll be able to own one, too, from today, or at least part of one when Ferrari shares begin trading in New York later. At $52 each, they ain't cheap - the issue values Ferrari at an incredible $9.8 billion (£6.3 billion) - but expect plenty of tyre smoke at the opening bell as the shares race higher.

Ferrari firmed up the idea of a float this summer. In a weighty prospectus, the Italian marque's 90%-owner Fiat Chrysler Automobiles said it would offload 10% of the business ahead of an exit early next year. Enzo Ferrari's son Piero Ferrari will continue to own a 10% stake.

Clearly, demand for the 17.18 million shares was high. Reports suggest the $893 million offer was "well oversubscribed", which implies further buying when trading begins Wednesday. Pricing the IPO at the top of the previously-flagged $48-$52 range should be no barrier, either, according to experts.

Management, we hear, had toyed with the idea of $53. But in the current environment where IPOs, particularly in the US, have struggled to get away or, at least, keep their value, it makes sense. But is this a float that investors should get excited about.

Well, last year it made a net profit of €265 million on revenue of €2.76 billion, and a margin of 14.1% gives operating profit of €389 million. Porsche is the only other carmaker that gets near that kind of return. Barclays forecasts just 9.6% for BMW this year and around 6% for scandal-hit Volkswagen. And Ferrari is expected to sell almost 8,300 cars in 2018, says the broker, up from an estimated 7,100 this year. That should drive revenue to €3.4 billion in three years.

"We believe this exceptional financial performance positions us as not just a leading luxury automaker, but as one of the world’s leading absolute luxury brands," said Ferrari this summer. But that could be a problem. Those margins might look good against rivals in a typically lower margin industry, but if Ferrari is pitching for a luxury brand rating, they will need to be even better.

LVMH, the French firm which makes expensive leather bags and Moët Champagne, is tipped to keep margins above 18% this year. At Cartier-to-Montblanc pens outfit Richemont it's over 21%. They trade on 22 times and 18 times forward earnings, respectively, and earnings are expected to keep growing at a fair lick.

And remember, Ferrari must spend heavily developing new technology to stay ahead of the competition. It runs a resurgent, but incredibly expensive, Formula One racing team, too. In 2014, the company spent almost €541 million on research and development, up 13% on the previous year and 25% more than in 2012. For the past two years, operating profit has risen just 9% and 7%, respectively.

It's fair to say carmakers have not been flavour of month since the VW emissions scandal broke five weeks ago. Valuations plunged and confidence is only just returning. Of course, this is not Ferrari's problem, but modest growth and cost pressures are.

Be in no doubt there will be plenty buying Ferrari shares today, but most will be fans of the brand. Canny investors will have bought Fiat stock 12 months ago when news of the flotation plan first emerged. Watch out for volatility, too, until the free float increases with a further sale from Fiat early next year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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