Ferrari Stock: Valuation Isn’t Attractive (Rating Downgrade) (NYSE:RACE)

Since early March 2022, our team has had a long-standing buy rating on Ferrari (NYSE:NYSE:RACE). With a publication called Ferrari To RACE Again, we recorded a triple-digit stock price appreciation (Fig 1). In 2024, we were also expecting an Outperformance, but we believe the company’s valuation isn’t attractive. While we like Ferrari’s quality and long-term growth prospects, we lower our recommendation from buy to neutral. However, we raised the target price from €350 to €380 to reflect higher earnings estimates and lower expenses in the long term. We see the stock market focusing on quality companies; however, after a plus 30% since our last update (early January 2024), the stock trades at almost 12x sales and a P/E >50x on its 2024 guidance.

Fig 1

Ferrari Numbers into Perspective

Here at the Lab, we like auto companies, and we have luxury cars in our coverage. We closely follow Porsche AG, Aston Martin, and Lamborghini, which Volkswagen controls. Therefore, before providing our update and to help our readers, it is vital to report our following takeaways:

To repay Ferrari’s current market capitalization of €73 billion, at the record of an average selling price of €397k per car with a net profit margin of 21%, Ferrari should sell more than 800k cars. At the current production rate, it would take more than 60 years to do so.

Another consideration to help investors put the company’s scarcity into perspective:

Dr. Ing. h.c. F. Porsche AG (or P911) (OTCPK:DRPRF) (OTCPK:DRPRY) makes in one year what Ferrari has made in its entire history. The Italian company was founded in 1939;

Ferrari delivered approximately 13,663 units, equivalent to Toyota’s ten production hours.

Our Negative Takes

Our previous analysis anticipated 2024 sales and EBITDA margin at €6.55 billion and 29.0%, respectively. This was backed by higher pricing (2%) and a better product MIX evolution (+6.5%). On a positive note, we considered higher car personalization, but we also took into account the lower average selling price of the upcoming Roma Spider (the new car has a starting price of €249,650 compared to an average selling price of approximately 397k per car recorded in Q4 2023).

Here at the Lab, we expect the usual beat-and-raise dynamic for Ferrari, and for this reason, we are above the company’s 2024 earnings per share outlook. Therefore, we stick with our previous numbers and confirm our 2024 EPS forecast at €8.4. We should also report that Ferrari’s initial 2024 guidance indicates growth of revenue and EPS between 8% and 10% (Fig 3). Indeed, Ferrari projects growth; however, this is slower than its historical average. Looking at the past year, revenue and EPS increased by 17% and 36%, respectively. Therefore, sell-side analysts might decide to lower the company’s target price.

There are also four negative news to be priced in:

1. Ferrari will face a class action in the United States. The company is accused of failing to repair a brake defect in some models, including the Ferrari 458 Italia. The class action identified a brake fluid leak, and despite car recalls, the company might face new complaints;
2. We believe Ferrari will slow down with the buyback. At well over 50x P/E, we are sure that Ferrari has better ways to deploy its capital. This might provide pressure on the company’s stock price;
3. The company is not immune to lower unit sales in China. In detail, sales decline in China in Q4 2023 (Fig 2);
4. Businesswise, there needs to be more certainty about electric-only technology. In the very long term, here at the lab, our team sees Ferrari as one of the few surviving car players that can produce internal combustion engine vehicles. However, this poses a risk, and we cannot forecast a volume growth story only for car collectors.

Source: Ferrari Q4 results presentation – Fig 2

Fig 3

Valuation

Here at the Lab, the time has come to question Ferrari’s valuation. The company’s business is more complicated than Hermès’, and this should suggest a discount on the stock market. Both companies currently trade at a P/E of more than 50x, close to all-time highs and substantially above the multiples of other luxury companies. However, if we imply slower earnings per share growth rate (15% and 20%), Ferrari’s P/E target should be valued at around 35/40 times. Today, Ferrari trades at parity with Hermes, and we are not going into the common saying, ‘Ferrari’s always been expensive and always will be.” Our 2025 EBITDA margin is at 39.5%, while Hermès reached a record year EBITDA margin of 47%. Therefore, we believe a 10% discount is justified. The French luxury giant trades at a 50x P/E, and continuing to apply a 10% discount, we derived a price target of €380 per share ($405 in ADR). Ferrari’s fundamentals are similar to those of automotive companies, such as lower sales in China and auto parts issues (North American class action is just an example). Therefore, we moved our rating to an equal weight two years later.

Risks

Here at the Lab, we consider different risks, such as Ferrari’s lower volume growth, rapid change in consumer tastes and technology, failure in Formula 1, and, we believe, a lower valuation methodology from sell-side analysts. Ferrari is an automotive company that is affected by common business risks such as currency evolution, raw material pricing pressure, defective auto parts, and wage inflation. The company is also subject to a high corporate tax. Ferrari is moving on with new lifestyle activities such as the Fashion industry. From now on, the company will launch a fashion collection every year for both men and women. This is a new business, and it might fail to meet expectations and the necessary product development.

Conclusion

Ferrari has a solid order book, and the company’s production is covered until 2025. Investors and sell-side analysts positively viewed Ferrari’s backlog; however, the company’s EPS might be slower than consensus expectations. Again, Ferrari’s exclusivity is also perceived due to limited auto production. Last time, we were the first to believe that there was Luxury Upside Still To Price In, but today, considering a high valuation, we decided to lower Ferrari’s rating to a neutral status.

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