Monday 26 August 2019

Share Watch: Ferrari - not just a fantasy, but a real-world investment

Company forecasts net revenue to rise to €3.5bn

One of the world's leading luxury car brands, Ferrari produces its highly rated cars in Italy and sells in 60 markets through a network of authorised dealers. Stock photo
One of the world's leading luxury car brands, Ferrari produces its highly rated cars in Italy and sells in 60 markets through a network of authorised dealers. Stock photo

John Lynch

I'm looking for a bit of patience this morning. I'm having trouble with the Ferrari. It's not, of course, that I have the sleek Italian gas-guzzler humming outside the door, though thank you for thinking I did. My problem is with its share price and whether it should be rated as a luxury product like Hermes or Gucci or as a straightforward car manufacturer, like Toyota or Ford.

There is little room for doubt that the beautiful piece of engineering is a luxury product, as only a privileged few can afford the €250,000 starting price. Like all luxury goods producers, Ferrari controls output, creating scarcity and helping it achieve top prices. However it is well to remember that the company is not immune to the volatility of the wider auto industry and cannot avoid emission standards or hybrid/electric alternatives.

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One of the world's leading luxury car brands, Ferrari produces its highly rated cars in Italy and sells in 60 markets through a network of authorised dealers. It employs 3,600 and boasts a stock market valuation of €27bn.

In 1969 Italian car giant Fiat acquired 50pc of the company and 20 years later increased its holding to 90pc. Four years ago Ferrari was listed on the New York Stock Exchange.

The company carries the name of its founder, Enzo Ferrari, who initially made his mark in the glamorous motor racing circuits which the group still inhabits and often dominates.

The success of its racing team forms a large part of Ferrari's identity and appeal and to date the chequered flag has ushered in some 236 Grand Prix victories and 16 world construction titles.

Ferrari's current sports and GT product range consists of six models. The company also produces two special series cars, limited editions and one-off cars. It faces strong competition from Lamborghini, Mercedes, Austin Martin and Porsche but has a market share of 15pc worldwide. Last year it sold 9,250 autos, up from 7,250 five years ago. It also produces car engines for Maserati and has 36 retail stores worldwide, offering a wide range of apparel and accessories.

Surprisingly it also sells previously used Formula 1 cars such as those driven by Kimi Raikkonen and Felipe Massa. The group's Europe, Middle East and Africa division accounts for almost half of group sales, the Americas a third and China less than a tenth.

Ferrari is planning a transition to hybrid cars in the medium term but at a slower pace than the major auto companies, reflecting its concern that the switch to hybrid technology could dampen the driver experience.

This will present challenges because of increased research and development spending and other costs.

Although it is seen around the world as an iconic Italian brand, Ferrari is now incorporated in the Netherlands.

It recognises that its financial performance is influenced by the perception of its brand, which in turn depends on factors such as design, quality, performance and image.

Last year Ferrari had a solid financial result. Net revenues for the year were €3.4bn with net profits of €785m, three times higher than five years ago. Its shares currently trade at €148, off its yearly high of €152 but up 75pc on the year. The company forecasts net revenue to rise to €3.5bn and earnings by 6pc.

How then should Ferrari be viewed by investors?

Like other luxury goods, the prestige auto business has shown resilience since the financial crisis a decade ago. A sustained period of wealth creation in several Asian countries has led to increased demand.

And there will always be obscenely paid footballers, rock stars and world leaders who will be happy to see the black prancing horse logo dotted around their spacious garages. This European mid-cap share might be a winner.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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