Editor’s Note: This story was changed to reflect a correction in the ticker symbol from “FERI” to “RACE.” We apologize for the error.
To paraphrase Benjamin Graham, when you buy a stock, do as you’d do in a grocery store. That is, always ask the question, “how much?”
Somehow, though, as it relates to the Ferrari IPO, investors aren’t thinking about the price.
Investors are instead thinking, “Who cares about price; it’s a Ferrari!” But not considering the price of Ferrari stock is, at best, a misguided strategy.
Before you go all in on the Ferrari IPO, let’s kick the tires and see if this ride is worth is.
Ferrari IPO: Quick Facts
- The Ferrari IPO is set to take place today and RACE stock will be traded on NYSE from Wednesday.
- Ferrari IPO underwriters, UBS Group (UBS), BofA Merrill Lynch (BAC) and Santander (SAN) , are seeking to raise roughly $1 billion. That reflects a price of $48 to $52 per share, and a valuation of $9.8 billion for Ferrari.
- Ferrari recently forecast that it intends to increase production within a year, to 10,000 cars from the current 7,000.
- The main stakeholders are Piero Ferrari and Fiat Chrysler Automobiles (FCAU). After the IPO, Piero Ferrari, the son of Ferrari’s founder, Enzo Ferrari, will own 10%. FCAU, the parent company, will be diluted to roughly 80%.
Ferrari Earnings vs. Valuation
Now that we’ve outlined the basics let’s take a deeper look at the financials of the Ferrari IPO.
The company’s last reported annual results of 2.76 billion euros (about $3.13 billion) in revenues reflected a growth of 18% year-on-year. Over the space of five years (2010-2014) growth in revenues averaged 11%, which is pretty decent. Over the same period, growth in earnings averaged 8%.
Click to Enlarge Now, let’s be perfectly clear; those are pretty solid results. The problem? It’s doubtful they can get much better.
The $9.8 billion valuation, compared with a net profit of roughly $300 million for 2014, reflects a price-to-earnings ratio of 33. That’s much higher than industry peers and even higher than a company like Apple (AAPL), which doesn’t have growth constraints.
Let’s take into account Ferrari’s hype that it will increase manufacturing to 10,000. If earnings did grow according to plan, Ferrari’s P/E would drop to 23, which is still fairly high.
Moreover, it’s unlikely that Ferrari could increase production (by what amounts to 40%) so quickly. Especially when you consider that over the past five years production increased by only 2% a year on average.
Further, consider that, from its latest SEC filing, part of Ferrari’s strategy is to cap production. That means that revenue growth cannot jump too fast and the same goes for earnings. So why pay a premium for much higher growth that is far from guaranteed?
You’re probably wondering about Ferrari’s Formula-1 business and related merchandising — you’re asking yourself could that be a game changer.
Though that segment accounts for roughly 17% of revenues ultimately, that translates to less than 1% in revenue growth year-over-year.
So, really, beyond its cars, there is no wild card for Ferrari.
Wait for RACE Stock to Go Lower
Most people would love to own a Ferrari. After all, it’s the stuff of dreams, right? Do yourself a favor and buy a nice Ferrari poster or a mini model. Just don’t expect Ferrari’s IPO to ride the NYSE like a Testarossa off the starting line.
Wait for the hype to drain and for RACE stock to trade lower. Then, and only then, can you count on the Ferrari growth engine to deliver value.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
