Lotto-Ticket Ford Versus Larger-Cap, Long-Term Ferrari

On May 4, Ferrari (NYSE:RACE) passed General Motors (NYSE:GM) in terms of market capitalization. It likely passed Ford (NYSE:F) sometime earlier in 2020.

Earnings Aren't Going To Be Pretty, But Buy F Stock Anyway

Source: Vitaliy Karimov /

Does that make Ferrari a better buy than F stock?

Ferrari is a Better Long-Term Hold

I’ve long been a fan of the luxury-goods company LVMH (OTCMKTS:LVMUY). Not because I aspire to live the good life, but because I’ve always felt luxury goods companies tend to do better in recessions because wealthier people maintain disposable income.

The same thinking applies to Ferrari. The demographic it caters to are generally going to be able to afford expensive sports cars in good times or bad.

On May 4, Ferrari reported its first-quarter results. They were better than expected. On the top line, it had revenue of $1.02 billion, $168 million higher than analyst expectations. On the bottom line, it had earnings of 98 cents, eight cents higher than the consensus estimate.

While revenue declined 1% in the first quarter, it shipped 2,738 cars, 128 more than a year earlier. Further, at the same time, it cut guidance for the year and warned the second quarter would be affected by the novel coronavirus, it did announce that its two plants in Italy had reopened. RACE stock gained 7% on the news.

As I write this, Ferrari’s market cap has fallen below $30 billion. However, it is still $10 billion greater than Ford’s valuation.

Ford had an 89% decline in its sales for the quarter in Mainland China, Hong Kong, and Taiwan. However, overall revenues increased 5% as a result of a 25% increase in Europe, the Middle East, and Africa and a 23% increase for the rest of Asia Pacific. Helping push sales higher was its 488 GTB and 488 Spider.

Ferrari’s revised guidance for 2020 includes sales growth of 3.4-3.6% and earnings per share growth of 2.4-3.1%. While it’s lower than its guidance at the beginning of the year, it’s good to know its management is still enthusiastic about its business despite Covid-19.

“As of now, we have yet to witness any abnormal or untoward cancellations, although several have been incurred primarily in Australia and the United States, but nothing so far that we would deem to be alarming,” CEO Louis Camilleri said in the Q1 2020 conference call.

“While history is certainly not this positive, it can inform us. A reading of the level of cancellations, during the last financial crisis reveals that the peak of cancellations, and postponements took several months to affect the order book, and thus it is still too early to come to any final conclusion.”

The Ferrari brand is iconic. RACE might get knocked around a little in the next 3-6 months, but that provides a better entry point.

In the automobile manufacturing business, being a niche player like Ferrari, with 24% margins compared to 5% for most companies, is a major selling point.

F Stock Has Better Upside

How low can Ford stock go? It hasn’t traded this low since 2009. Before that, you’d have to go back to 1990. The Ford Family, who controls 40% of the company stock, obviously hopes for better days ahead.

A recent Bloomberg article discussed how Henry Ford III, the great-great-grandson of founder Henry Ford, had recently joined the investor relations department at the company. He might not want to mention to investors that Ford stock is down 91% since his cousin Bill Ford became chairman in 1999. As Bloomberg points out, the S&P 500 is up 129% over the same period.

In my most recent article about Ford in April, I recommended that most investors steer clear of its stock until car sales return to normal. That said, I did suggest that under $5, it was a buy for  “aggressive investors who understand the concept of risk to reward.”

InvestorPlace’s David Moadel makes the case that Ford is getting back to production with China doing well and Europe getting ready to go back to work. Ultimately, all of its assembly plants will be up and running, providing the company with renewed sales.

Moadel believes that Ford is trading at a deep discount to its intrinsic value; a recovery of the automotive industry in the U.S. and elsewhere ought to provide a boost to its share price because it’s hard to imagine it going any lower.

He’s got a point. 

In terms of bottom-feeding, InvestorPlace contributor Joel Baglole pointed out that at the end of the first quarter, Ford had $34 billion in cash and $35 billion in liquidity. In January 2019, it only had $24 billion in cash, along with the same amount of liquidity. So, the company added $10 billion in cash to its balance sheet over the past 15 months, providing a nice cushion should the ramp-up of production take longer. 

Based on 3.9 billion shares outstanding, Ford has $8.70 in cash per share, which means as I write this, its stock trades at 0.56 times cash. Even if that cash number were to decline to just $2 a share, at less than three times cash, it’s still historically low. 

The Bottom Line

If you’re asking me which is the better brand, I don’t think there’s any question it’s Ferrari. 

If you’re a risk-averse investor, I don’t think there’s any question Ferrari’s the better buy.

However, if you’re asking me which is the better lottery ticket, I don’t think there’s any question it’s Ford.    

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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