It was in October 2014 when the US-Italien conglomerate Fiat Chrysler Automobiles announced its plan to separate Ferrari (Stock Ticker: RACE) from the carmaker group. The spin-off was completed in January 2016 and marked the beginning of one of THE most ICONIC CAR brands on the stock market.
Historically, car companies have been quite tricky investments. There are characteristics of the automobile industry you should know before taking a stake in such businesses. For one, It’s an extremely capital intense, very cyclical business that in general is also highly dependent on leverage. And of course, cars involve a whole lot of technology, so the business has inherently disruption risks. Consumer staples companies such as Hershey, Nestlé, L’Oreal, Heineken, etc. in contrast don’t require heavy investments in order to keep their profitability. Carmakers need to invest and innovate constantly to even stay in the game.
And yet car stocks are certainly worth have a look at as from time to time as they tend to become undervalued. For some time period e.g. in 2020, you could have collected Daimler, BMW, Porsche SE stocks on the cheap. So there certainly are opportunities with car companies.
Many investors love their Tesla stocks, and they rightly do so. TESLA is more than just a car company. It represents disrupting technologies, a new automobile era. It’s a super-growth car company that happens to be at the same time an extremely innovative software company, a battery, and solar business, and is also an extremely interesting energy play.
Besides the electric car opportunities like Tesla, Nio, Build Your Dream (BYD), etc. on one side and the “traditional” car businesses (BMW, Daimler, etc.) on the other side, face serious threats of disruption, there is an auto company that truly stands out: Ferrari, the Italian racing cars and sports car maker.
It’s not a car, it’s a Ferrari. The brand is a symbol of speed, luxury, and wealth. And brand loyalty is incredible.
Ferrari is on top amongst the strongest brands in the world which is extremely interesting when you think that the company produces roughly 10’000 vehicles per year. Now think about that: BMW and Tesla will each sell for more than one million cars this year. Now, look how extremely limited the Ferrari productions are. It’s always “limited edition”. It’s always kind of unique. Market demand far exceeds production offers.
This can only be done by companies that literally provide customers with “legendary products”.
Throughout the company’s history, the Ferrari has participated in racing, especially in Formula One. Ferrari has the oldest and the most successful racing team which is holding most championships. The Ferrari road cars are kind of racing cars too. Their design and technological interior are unmatched and Ferrari cars are high-quality luxury items.
Now, before even considering investing in a company, it’s essential that there is a clear and visible economic moat. Well, when it comes to Ferrari, we are talking about a company that over more than a century has been successfully built one of the world’s strongest premium brands. That brings pricing power. Throw in increasing economies of scale, and you can see a durable advantage over competitors.
Now, let’s have a look at the Ferrari stock price. So, we all know that Italy has been hit particularly hard by the COVID-19 pandemic and that the country has taken very tough lockdown measures which had negative effects in particular on the company’s shipping. The stock sports a Price-Earnings-Ratio (PE-Ratio) above 50, but that will come down quite substantially in the course of 2021 and 2022 as the world recovers from the pandemic.
But still, that stock looks incredibly expensive, when you compare it for instance to BMW and Daimler, with PE-Ratios at around 10.
But bear in mind, that we are not talking about an ordinary car company. If you want to compare the Ferrari stock, do it with the one of Louis Vuitton Moet Hennessey (LVMH), the most valuable European company. Then you will see, that Ferrari compares favorably towards the largest luxury companies and shows even more interesting organic growth potential.
Investors sometimes shy away from “expensive stocks”, but Warren Buffet and Charles Munger are perfectly right when they say that it is far better to buy pieces of a wonderful company at a fair price than buying a good or mediocre business at a great price.
Just embrace market volatility, as always, any stock can come down substantially. Just think of that: a 10 to 20 % drawdown would bring the Ferrari stock to a PE-Ratio of 40 resp. considering EPS expansion clearly below 30.
Now, look at shares of luxury giant LVMH or beauty company L’Oreal, have you often and for a longer time period seen their stocks in the high twenties?
Well, with that in mind, for a long-term-oriented investor, it’s definitively worth putting Ferrari on the watchlist and patiently wait for the stock price to move where one feels completely comfortable with pulling the trigger.
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.