Ferrari Is A Cornerstone Of My Portfolio: Here Is Why

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Introduction

Ferrari (NYSE:RACE) is simply a cornerstone of my portfolio. Superior brand-recognition, coupled pinch superb supercars and a very predictable business exemplary makes maine very assured astir this investment.

Ferrari is besides a 1 of those stocks usually considered overvalued and excessively expensive. This is why worth investors usually enactment distant from it. However, I started buying Ferrari precisely because I deliberation nan banal reflects a premium nan institution really deserves, arsenic I person tried to show a fewer times connected SA.

On a individual note, I americium a small fond of Ferrari because the first article (and 1 of my favourite ones) I ever published connected SA was astir it. Of course, I was bullish. Since then, nan institution has offered a full return adjacent to 25% vs. -0.29% returned by nan S&P500.

Ferrari recently reported its Q4 and FY2022 earnings report and provided its first 2023 guidance. In addition, it conscionable unveiled nan caller SF-23, nan car we will spot during nan 2023 Formula 1 World Championship.

I don't for illustration nan look "no-brainer", since each finance requires a thought process. However, each clip I look astatine Ferrari, I spot galore evident reasons supporting nan bull-case. Here we will return a look astatine immoderate of them.

The bull-case

I don't want to walk a batch of words connected a wide introduction, since Ferrari is simply a very well-known institution and, according to Brand Finance, it is presently nan 7th strongest marque successful nan world.

Here are nan main aspects I for illustration astir nan company:

1. It manufacturers cars, but its products are really luxury vehicles. Therefore, it has alternatively precocious margins compared to each different car manufacturers.
2. Its business exemplary is very restrictive connected volumes, staying existent to what Enzo Ferrari said: "Ferrari will ever present 1 car little than nan marketplace demand". This creates merchandise exclusivity and beardown pricing power.
3. Ferrari's business exemplary makes it easy for investors to foretell early net and rate flows.
4. Ferrari's TAM is expanding arsenic much group astir nan world participate into nan class of HNWI (high-net-worth individual) who person liquid assets of astatine slightest $1 million.
5. Ferrari is simply a best-in-class technological innovator: it is already manufacturing hybrid cars and by 2025 it will unveil its first all-electric car, where, we know, location will beryllium a unsocial measurement to comprehend nan caller sound of nan engine.
6. The new Purosangue (Italian for "thoroughbred" is simply a game-changer arsenic it developed a caller benignant of conveyance a four-door four-seater luxury sports car.
7. Purosangue bid books are full. This intends a high-margin conveyance pinch galore personalization optionals will effect importantly Ferrari's financials.
8. Ferrari is simply a cleanable fresh for a dividend maturation portfolio, pinch increasing free rate flows that support increasing dividends (with a debased payout ratio) and stock repurchases. An important truth is that Ferrari doesn't person stock-based compensation, frankincense location is nary dilution of buybacks nor immoderate accounting problem erstwhile looking astatine free rate flow.

Full Year 2022 Results: highlights and thoughts

Usually, we commencement considering an net study from nan top-line. This clip I want to commencement from thing extracurricular of nan financial statements. It is thing I see highly applicable to measure Ferrari.

The Prancing Horse, successful fact, disclosed that its bid book extends good into 2024. Yes, you person publication nan day right: 2024.

The implied consequence is clear: Ferrari already knows reasonably good what to expect from 2023.

This is 1 of nan cardinal aspects I for illustration astir nan company: it is highly predictable. In addition, nan institution is utilized to supply a guidance astatine nan opening of nan twelvemonth that it tin reasonable meet and, oftentimes, beat. We tin spot this from nan chart below, wherever nan only objection is 2020, for evident reasons.

Author, pinch information from Ferrari's reports

For this past year, Ferrari had initially provided a nett gross guidance of €4.8 billion. Since, my first article backmost successful May, I was inclined to deliberation Ferrari would scope €5 billion. It really reached €5.1 billion, arsenic we tin spot from nan item descent taken from nan results presentation.

Ferrari Q4 Results Presentation

Using nan slide, we tin besides fig retired a fewer things. First of all, revenues accrued 19.3%, much than nan +18.5% seen successful shipments, meaning that nan price/volume operation was favorable. I expect this quality to summation adjacent year, arsenic Purosangue income prime up.

On nan different hand, Ferrari excessively acquisition a spot of separator compression some connected EBITDA and EBIT. However, these person been years wherever Ferrari has pounded connected capex to create hybrid and all-electric cars, creating caller cutting-edge exertion up to its iconic and exclusive reputation. Considering these investments, nan consequence connected margins is rather good. This leads to EPS and business free rate travel growth.

It is important to attraction connected nan business broadside of nan business because Ferrari has a financial branch which has its operations and, astir importantly, its debts, linked to nan financing activities.

Therefore, to get a grasp of nan halfway business, we person to look astatine business free rate travel and business debt. Here below, we tin spot really Ferrari generated beardown business FCF during 2022 that much than covered its dividends and its stock repurchases, while being besides utilized to trim nan nett business indebtedness (already rather low) by different 30%. It is nan business indebtedness that represents a company's operational risk. I don't want to sound excessively enthusiastic, but, to me, it seems for illustration we are earlier an fortress, operationally speaking.

Ferrari Q4 Results Presentation

Having seen this, we tin look astatine nan reconciliation of non-GAAP measures to show nan nett business debt. As we tin see, it spiked up during nan pandemic, but Ferrari was capable to bring it down aggressively already successful 2021, to nan grade it was already beneath its 2019 levels.

Ferrari Q4 Results Presentation

On nan different hand, we spot nan nett indebtedness of financial activities increase. This should not beryllium seen arsenic a large issue, but really arsenic thing affirmative because it shows really nan financial activities are really growing. Most automakers person specified a branch and it is accounted for arsenic debt.

Geography

Let's return a look astatine Ferrari's income by geography. We spot nan awesome YoY maturation successful China, Hong Kong and Taiwan. If we comparison nan 2 afloat twelvemonth results we person a 72% increase, which tin besides beryllium explained pinch nan reopening of China. Some SA readers whitethorn cognize I americium not really fond of being exposed to China. However, Ferrari addresses a peculiar niche of customers and enjoys specified a beardown brand-recognizition that I spot it somewhat much immune to geo-political tensions and conflicts.

Overall, we spot beardown capacity successful nan Americas, too, wherever shipments accrued by 21.7%. It is clear request is still location for Ferraris and I deliberation it would not beryllium astonishing to spot nan Maranello-based shaper extremity up trading astir 18,000-20,000 vehicles per twelvemonth by 2028.

Ferrari Q4 Results Presentation

The Purosangue effect

During nan earnings call, Ferrari's guidance reported immoderate absorbing news regarding nan Purosangue:

The Purosangue bid intake has been extraordinarily high, good beyond our expectations. But nan enthusiasm of our clients is expressed besides by their attendance level astatine each our events. In fact, successful 2022, we had an unprecedented number of unrivaled customer engagement experiences.

In particular, it was highlighted really nan Purosangue is simply a car wherever personalizations are rather precocious successful proportionality to full revenues, making Ferrari scope an 18% of full personalization gross compared to revenues from cars and spare parts.

Guidance

Let's get to a constituent nan marketplace seemed to appreciate: Forward guidance. Where is Ferrari headed towards?

In my past investigation I wrote I expected Ferrari to scope a gross of €5.5 cardinal successful 2023 and to break nan €6 cardinal obstruction successful 2024. My thought was that Purosangue income should make 20.7% of full revenues successful 2023 and 21.8% successful 2024. This made maine see Ferrari capable to scope an adj. EBITDA separator of 37% successful 2023 and a 38% successful 2024, which would person led to a 2023 adj. EBITDA supra €2 cardinal and astir €2.28 cardinal successful 2024. I besides wrote I was forecasting that EBIT separator will increase, projecting it astatine 26.5% successful 2023 and 28% successful 2024, which translates into a 2023 EBIT of € 1.33 cardinal and of €1.68 cardinal successful 2024.

I thought I was already being a spot bold, nevertheless Ferrari amazed maine too, providing higher than expected guidance.

In fact, nan Prancing Horse forecasts nett revenues of €5.7 cardinal pinch an adj. EBITDA separator of 38% good supra €2 billion. Regarding EBIT separator Ferrari is successful statement pinch my forecast of 26% successful 2023.

Ferrari Q4 Results Presentation

Given this guidance, I deliberation it is reasonable to expect Ferrari to travel adjacent to €6 cardinal successful nett revenues astatine nan extremity of this year, which, pinch an adj EBITDA separator of 38% would mean € 2.28 cardinal of EBITDA. I wouldn't beryllium amazed either if nan institution reached €1 cardinal successful business FCF. But, erstwhile again, I would for illustration to accent 1 point: Ferrari is not an finance focused connected immense estimation beats, but alternatively connected dependable and highly reliable maturation generated by nan moat provided by marque exclusivity and merchandise quality.

An oculus connected Formula 1

Last year, Ferrari started nan World Championship pinch a Grand Prix triumph and for nan first half of nan twelvemonth it seemed to beryllium capable to compete for nan title. However, nan 2nd half of nan title saw Ferrari deed by reliability issues and nan racing squad came successful 2nd position. However, returning to compete for nan title accrued revenues from sponsorships. This year, Ferrari conscionable unveiled its caller SF-23, which has superior ambitions of winning nan championship.

Ferrari Racing website

Though nan revenues from sponsorships is not a awesome interest for Ferrari, results successful Formula 1 are, arsenic they person a nonstop effect connected really nan institution is perceived astir nan globe. Ferrari has stated galore times that winning nan title is simply a cardinal attraction of nan full company, not only nan racing team. Let's spot what happens this twelvemonth to this regard.

Valuation and conclusion

I deliberation fewer group tin entity to nan value Ferrari has arsenic a company. But galore group judge nan banal to beryllium excessively expensive. I person shared galore times successful my erstwhile articles that I deliberation Ferrari should waste and acquisition successful a scope betwixt $260-290 a share.

Given nan caller guidance and nan truth that I deliberation Ferrari will overdeliver, I plugged successful a FCF maturation complaint of 11% for nan adjacent 5 years. I besides discount nan rate flows considering Ferrari worthy of a premium. Instead of utilizing its WACC of 8.23%, I return distant 1.2 percent points to usage a discount complaint adjacent to 7%. I deliberation a business for illustration Ferrari's good deserves specified a premium. Please announcement each numbers are successful Euro, since this is nan rate Ferrari uses to study its financial data.

Author, pinch information from SA and ain estimates

With these numbers, I find Ferrari to beryllium erstwhile again a banal pinch immoderate absorbing upside. First of all, my target value has surgery nan €300 barrier, which successful USD is presently adjacent to $318 per share. This is why Ferrari is still a bargain for maine and it is simply a banal I ever effort to bargain much shares of.

I attraction connected agelong word maturation and dividend maturation investing. I travel some nan US and nan European banal markets, looking for undervalued banal and/or for precocious value dividend increasing companies that supply maine pinch rate to reinvest. I put only successful banal of companies that tally a business I understand done nonstop experience.