Ferrari: Outperformance In 2024 Expected (NYSE:RACE)

Here at the Lab, our readers know we closely follow the automotive and luxury sectors. Ferrari (NYSE:RACE) is a unique business that combines the two industries, and there are almost no companies with this ability to allocate their production to clients with an order book that stretches until 2026. Our internal team has not commented on the company’s Q3 results, but today, we provide a Q4 2023 preview combined with our forward-thinking expectation for 2024.

We have always appreciated Ferrari’s impressive execution, earning visibility and protection from macroeconomic factors supported by its audience of ultra-high-net-worth individuals. Following our last Ferrari analysis called Outlook Appears To Be Conservative, the company raised its 2023 outlook with approximately €100 million more adjusted EBITDA to arrive at €2.25 billion in 2023. Greater customizations supported this. In numbers, Ferrari achieved another remarkable Q3, beating estimates in every P&L line.

Q4 expectations

Looking back, the company initially guided for a 26% adjusted operating profit margin in 2023. EBIT margin was raised to 26.5% in early November; however, this would imply a significant drop in the last quarter. This EBIT decline is unlikely to materialize in our estimates. However, on a sequential basis, we estimate a slight contraction. This is based on several factors, which include: 1) a weaker country MIX with Q3 numbers excellent thanks to US sales; 2) lower shipments (in our estimates, we forecast flat volumes compared to the Q4 2022), 3) higher depreciation and amortization cost (this includes new models production for cars such as Ferrari SF90 and Roma Spider) and 4) higher research and development cost linked to F1 expenses (this cost is higher due to product development).

In a nutshell, our internal team is confident that Ferrari’s operating profit will likely reach €355 million with a margin of at least 23.5%. Last year, the company accurately forecasted its 2023 sales and earnings growth profile. As a reminder, Ferrari’s 2022 EBIT growth was supported by FX and volume, while the cumulative 2023 operating profit was backed by price & country MIX and personalization (these effects combined worth a total EBIT contribution of approximately €349 million). In 2023, volume was also a positive outlier, representing a growth of €58 million, much lower than in 2022, which positively impacted Ferrari by €261 million. On the downside, FX was a tailwind for €39 million this year. Our year-end estimates are €5.95 and €1.6 billion in sales and EBIT, respectively.

2024 Upside

Looking ahead, the company forecasts a slight deterioration in the production of the MIX series. This is due to a lower starting cost from Roma Spider (€249,650). Despite that, we are confident that Purosangue sales will accelerate. Roma Spider and Purosangue were the only two cars not entirely sold out. In the Q3 analyst call, the CEO explained how the MIX will remain solid in 2024. Although we won’t see the 2023 step up, Ferrari model momentum will likely deliver earnings growth. Therefore, there are at least three upsides to consider:

1. We are guiding personalization of approximately 18% of sales.
2. Starting from Q2 2024, the company will start selling the 296 Challenge with a healthy premium compared to the 296 GTB. In addition, Ferrari will deliver the first vehicles from its new «Sport Prototipi Clienti.” This new program allows clients to purchase a modified version of a Le Mans-winning car. This is “the firm’s most exclusive project,” with rumors that each car costs €5.1 million. This would make it the most expensive Ferrari ever.

3. The 2023 FX drag is expected to be less severe in the upcoming year, and the company’s poorer finish in the 2023 F1 season will also be compensated by more races in the 2024 season (24 vs 22 in 2023).

The company’s five-year plan, released in June 2022, envisages a core operating profit margin in the 27-30% range by 2026. We believe Ferrari is well on track to be on the target upper end. Overall, in 2024, we anticipate Ferrari will achieve €6.55 in sales and €1.90 billion in EBIT with a margin of 29.0%. This is supported by higher pricing (2%) and a better product MIX (+6.5%), despite the Roma Spider release. Our 35% dividend payout forecast implies a dividend per share of €2.35. This means a DPS increase of 30% compared to last year’s payment.

Conclusion and Valuation

Two years of backlog, customization uplift, and higher pricing activities will bode well for 2024-2026. The discount to Hermes has materially expanded again compared to October 2023; in the meantime, the company raised its outlook again. Here at the Lab, we were already above Wall Street estimates. Indeed, today, we have made no changes in our forecast estimates. We expect the usual beat-and-raise dynamic for the company. Therefore, we maintained our buy rating of €350 per share ($382 in ADR).