- Ferrari shares are trading well below their IPO price less than a week since the company's IPO.
- What is causing this trend and can it be expected to change?
- Even more importantly, is Ferrari a good long-term investment?
After a great opening, FERRARI NV (NYSE:RACE) shares are now trading below their Wednesday IPO price. The stock had been priced at $52, the higher end of expectations. The stock opened at $60 per share at its IPO, dubbed the hottest IPO in 2015, last Wednesday and rallied 15% on the first day before tanking badly. No negative news has emerged from the luxury car maker yet. On the contrary, Ferrari delivered pretty decent Q3 results on Oct. 28.
Ferrari Stock Returns - 5 Days Movement
Source: CNN Money
Ferrari reported that revenue was up 9% (3% in constant currencies) to €723 million ($796.49 million) while shipments rose 19% Y/Y to 1,949 units during the quarter. Sales for the popular 8-cylinder models were up 33%. Shipments improved in all geographical segments except China where they fell 24% to 157 units. Net profit was up 62% to $94 million with EPS of €0.50($0.55). The company said that it expects full-year revenue of €2.8 billion ($3.08 billion) and adjusted EBITDA of €725 million - €745 million ($798.7 million-$820.73 million).
So why are Ferrari shares falling even after the decent report?
The report looked pretty solid with just a few disappointments here and there. For instance, Ferrari’s shipments increased 19% but revenue from its cars increased just 16% which suggests falling ASPs, which is not a good sign for a luxury car maker. Additionally, Ferrari’s revenue from engine sales to high-performance manufacturers such as Maserati and other Formula One manufacturers fell 33% to €51 million. This is a pretty negative trend because Ferrari is an ultra-exclusive auto maker and severely caps the number of vehicles it sells in order to preserve exclusivity of its brand. For instance Ferrari sold just 7,255 vehicles in 2014. Most of the company’s growth will therefore come from its non-car segments including engine sales as well as its sponsorship deals. The huge revenue slide by the key segment is therefore quite worrying.
But perhaps the biggest reason why Ferrari’s shares have been on a precipitous decline can be chalked up to their apparent overvaluation. Ferrari shares are trading at about 30x 2015 earnings compared to about 10x earnings for the average auto maker. While it’s true that Ferrari’s rapidly expanding bottom line can help the company to quickly grow into its steep valuation, there is no guarantee that Ferrari will keep growing earnings at such a brisk clip.
As investors have learned from Tesla (NASDAQ:TSLA), niche car manufacturers tend to receive plenty of equivocations from the market compared to traditional auto manufacturers. Tesla shares have performed exceedingly well since the company went public five years ago, and only stared getting punished recently due to the company’s continued lack of profits yet. Tesla shares still carry a much higher valuation compared to other auto makers even after the correction this year.
Ferrari is solidly profitable, and is in fact one of the most profitable car makers in the world. Ferrari’s EBITDA margin of close to 29% is way higher than the low single-digits margins by most auto makers.
Niche manufacturers such as Ferrari and Tesla are not likely to be affected by the cyclical decline that traditional manufacturers face whenever there is a recession. The demographic that buys luxury cars such as Ferrari represent the richest of the rich, and many won’t blink when spending half a million dollars on a new luxury auto or even $1.4 million on a brand such as La Ferrari. Having such a rich clientele insures Ferrari from the cyclical downturns that make many investors shun traditional auto makers.
Curious Ownership Structure
Ferrari sports a curious ownership structure with 10% of the company in the hands of Piero Ferrari, 80% in the hands of Fiat Chrysler (NYSE:FCAU) shareholders while the rest is what the company made available through its IPO.
Fiat operates a loyalty voting program that rewards shareholders who hold its shares for at least three years. The program provides a strong incentive for Fiat shareholders to hold on to their Ferrari shares, meaning that only 10% of Ferrari’s outstanding shares are readily available in the market. This small float means less liquidity for Ferrari shares, and is what has been causing the shares to be so volatile.
Is Ferrari a Good Investment?
The market tends to place a high premium on strong growth prospects, which is what Ferrari seems to be lacking. But then again Ferrari receives more than 25% of its revenue from non-car revenue sources, and these are segments that the company can grow with minimal limitations. Investors should probably start with a small position in Ferrari shares then build it up as the company unravels its growth path.