Ferrari: Digesting A Lewis Hamilton Bombshell And Another Earnings Beat (NYSE:RACE)

Ferrari (NYSE:RACE) sealed a marvelous 2023 with a great fourth quarter, but it seems that despite the impressive print, investors’ and fans’ attention was drawn away from the number onto a much shinier piece of news – the addition of racing superstar Lewis Hamilton to Scuderia Ferrari, the Italian carmaker’s Formula 1 team.

In my view, aside from the obvious racing-related impact of Hamilton’s signing, it has no less of an impact on Ferrari’s business, and more specifically, its lifestyle business, which I expect to be a huge growth opportunity for the upcoming years.

After the 13% surge, Ferrari is now up nearly 82% since the end of 2022, which begs the question – is there more meat left on this bone?

Let’s find out.

Introduction

I’ve been covering Ferrari on Seeking Alpha since March 2023, and maintained a Buy rating all throughout this period. Across each of my articles, I described a different aspect of my investment thesis.

I believe Ferrari is incomparable to any other car company out there, viewing its most relevant peer being a luxury fashion brand in Hermes (OTCPK:HESAF). Ferrari has unparalleled pricing power and control over its revenues, with a management team that manages shipments prudently with great awareness of the importance of scarcity. Lastly, I believe it deserves a relatively high multiple, yet investors should be aware revenue growth is due for deceleration.

So far, I’d say our thesis played out great. Let’s look ahead.

No More High Teens Growth, Is That A Problem?

If you’ve been following Ferrari, you should know by now that its management is essentially doing everything in its power to mitigate high expectations and enthusiasm within the investor community.

The best example would be its reluctance to update its 2026 guidance which it provided at Ferrari’s 2022 Capital Markets Day, a guidance that’s most likely going to be surpassed already in 2024.

As investors in Ferrari, probably the number one attribute you’d want management to have is a lack of greed. We can only imagine what a short-minded CEO would do with a business that refuses to satisfy the majority of the demand for products that generate a 38% EBITDA margin.

And just like the demand for its cars, Ferrari’s management needs to rationalize the demand for growth, balancing between customer loyalty, brand equity, and profits.

Between 2020-2023, Ferrari’s revenues grew at a 20% CAGR, with car shipments growing by a lower, but still relatively high, 15% CAGR. In my view, this is not what investors should expect going forward. Management guided for 7.2% growth in 2024, but we already know that their guidance is extremely conservative, so here’s a better data point for us:

As we can see on the graph, it took Ferrari three years to come closer to its historical growth trend in shipments, and I expect a full convergence in 2024, which reflects a very low 2% growth in shipments.

If we were talking about a mass market seller, I’d be worried, but in Ferrari’s case, I think the opposite is true. In order to maintain its status as one of the world’s leading luxury brands, Ferrari cannot grow shipments at a mid-teens pace forever. Nobody really knows what’s the perfect equilibrium between brand equity and growth in Ferrari’s case, but I think it’s safe to say that Benedetto Vigna, Ferrari’s CEO, is the number one person for that task.

So looking ahead, investors must realize that high-teens growth from the car business is not realistic. However, I believe there’s still plenty to be excited about.

Lewis Hamilton Signing & Ferrari’s Non-Car Businesses

Lewis Hamilton is arguably the number one Formula 1 driver in history, tied with Michael Schumacher at seven world championships. Hamilton’s signing increases Ferrari’s racing prospects significantly, which by itself is an important driver (pun intended) for the business, but that’s only one aspect of the deal.

Hamilton has a huge social media presence, with 35.8M followers. He’s really an icon and has a history in fashion, media, and entertainment. I’ll tell you this much – my fiancée has never seen a Formula 1 race in her life but she does know who Lewis Hamilton is.

As I discussed in previous articles, Ferrari has a non-car business that it aggregates under the Sponsorship, Commercial, and Brand segment (‘SCB’). The company doesn’t provide the numbers, but we can only assume that these activities have decent margins.

As we can see, the SCB segment generates a small part of total revenues, somewhere in the 9%-11% range for the past four years. On the 2022 Capital Markets Day, Ferrari set a target to double the segment’s revenues by 2026, and we can see that it’s well on track to deliver on this target.

I expect this segment to drive substantial upside in the near to mid-term, fueled by the signing of Hamilton, which should drive more sponsorship deals, and more attention to the brand. I wouldn’t be surprised if he gets to bring in some of his own new ideas to Ferrari as well.

During the earnings call, the segment received much more attention than usual. The CEO mentioned the success of a Ferrari-branded clutch bag, and emphasized their plans for 2024:

For lifestyle, let’s say three important things. Number one, we improved the retail performances, because there is more traction towards our collection. Two, we saw there is a successful activation when you have event in conjunction with our racing and brand event. And three, we had record museum visitors, around 750,000, which is a lot. In 2024, if I were to define it, I define it as a year of progress because we have a list of activities that are aiming to build the scale and also to expand the network and elevate the visibility of our brand. So it’s a year where we are aiming to grow and we are in line with what we declared in June 2022 with our target to double the revenues of this activity by 2026.

I estimate this segment will surpass €1 billion in revenues by 2026, which will help to offset the decelerating growth in cars.

Another important announcement was that Ferrari is entering the sea, with a plan to compete in the world of sailing. I have to say Ferrari and luxury boats sound like a perfect match to me. That being said, it’s still very early and I wouldn’t expect any contribution or major announcement on that front before the 2025 Capital Markets Day.

Reviewing 2023 & Expectations For 2024

Ferrari’s 2023 was remarkable, with 17.2% sales growth, and a 300 bps EBIT margin expansion, which led to 31.8% EBIT growth, 35.6% EPS growth, and 23% industrial FCF growth.

For 2024, the company is expecting significantly lower growth, targeting revenues of €6.4 billion, reflecting 7.2% growth, EBIT of €1.77 billion, reflecting flat margins, and EPS of €7.5, reflecting 8.7% growth.

It’s worth noting that Ferrari’s Engines segment, which was primarily a contract with Maserati has culminated in 2023. This will be a headwind on 2024 revenues of nearly 130 million, reflecting an underlying guidance of nearly 10%, rather than 7.2%. Margin should benefit from a better mix (despite the flat guidance).

Another noteworthy comment on guidance is that management assumed a similar personalization mix in 2024 relative to 2023, although they did mention they plan to increase prices, which as usual, means the guidance is probably very conservative.

I’m expecting revenues in 2024 to come in over €6.5 billion, and the combination of buybacks and flat margins to result in an EPS of €7.64, reflecting a 46x P/E multiple.

Valuation

Ferrari is trading close to the high end of its historical multiple range, at 47x based on its EPS guidance. As I said, it’s at 46x based on my estimates, although I believe there’s room for more upside.

Supposedly, it could be inferred that Ferrari is fairly valued at best. However, there are a few points that I think make Ferrari attractive despite the seemingly high valuation.

First, Hermes is currently at 48.4x based on consensus estimates for 2024, and there have been many times in the past when the stock traded above the 50x mark. I believe that Ferrari is yet to be recognized by investors as a similar quality of a company, although I’d argue Ferrari is even stronger.

Ferrari truly decides how much revenue it would generate in a given year, and it has essentially zero exposure to aspirational consumers, given its core business sells approximately 13,000 units worldwide in a year. Some of Hermes’ products have similar attributes (the famous Birkin of course), but not all of them.

Second, the company has a new significant growth pillar that wasn’t in focus in the past, fueled by the iconic Hamilton signing.

Three, even if the stock treads water for the rest of 2024, as we approach 2025, there’s a slew of catalysts including the first year with Hamilton, 2025 Capital Markets Day, and the electric vehicle going into production.

As a reminder, Ferrari’s order books are already filled well into 2025, so the probability of a surprise to the downside is essentially zero.

Taking all of this into account, I think the best strategy for investors would be to initiate a position and add on the occasional dips. Personally, Ferrari is nearly 10% of my portfolio and I don’t plan to trim my position in the foreseeable future.

Conclusion

Ferrari closed out another year of remarkable growth. From this point on, I’m expecting slower growth in shipments and revenues, as we go into a normalized phase of low-double-digit growth rate.

However, I’m as excited about Ferrari’s future as ever, with the combination of the Lewis Hamilton news, the increased focus on the SBC segment, and Ferrari’s expansion into sailing.

All in all, I believe Ferrari’s future success is one of the most certain trajectories in the market, and despite the relatively high valuation, I still see the stock as a Buy.