RACE - Ferrari: Time To Look Beyond Formula One

2023-03-23 12:26:50 ET

Summary

• Ferrari N.V. had a strong 2022 despite the macroeconomic and geopolitical risks.
• The company, in my opinion, is almost recession-proof given that it caters to the super wealthy.
• A strong product mix for 2023 and lack of challenges surrounding EVs bodes well for the company and its stock.
• From a valuation perspective, the stock shows considerable upside from current levels.

Investment Thesis

Ferrari N.V. ( RACE ) is a company whose stock has been catching the attention of a lot of people these days, in the same way its cars do on the road. I see a lot of analysts citing the stock as one of their top picks for 2023 .

In this article, I argue why the nature of the company’s business and the launch of new products such as the Purosangue more than justifies Wall Street’s attention towards the stock.

A Quick Preview of Ferrari’s FY22 Results

The company announced its FY22 results last month and the numbers, in my opinion, were impressive. Overall revenues came in at 5.1 billion Euros (approximately $5.54 billion), up 19% year-over-year. Diluted EPS came in at 5.09 Euros (approximately $5.53), up 13% year-over-year. The company generated free cash flows of 758 million euros (approximately $823.5 million).

The company also offered upbeat guidance for FY23 , with revenues expected to come in at approximately 5.7 billion Euros ($6.3 billion at an expected exchange rate of $1.10/euro) and adjusted diluted EPS expected to come in between 6 and 6.20 euros, which translates to a range between $6.6 and $6.8. The company now expects to generate free cash flows of approximately 900 million ($990 million) on the back of strong profitability.

Recession or not, the Super Wealthy are Not Going Anywhere

As I mentioned earlier, Ferrari caters to the super wealthy. Based on the evidence of the company’s FY22 sales, these individuals have no plans to stop spending whether we have a recession or not. To put things in context, in 2022, Ferrari managed to ship 13,221 units, registering a year-over-year growth of 18.5%. This was during a time when companies were laying off people, consumer confidence was hit, and inflation was wreaking havoc. And in 2023, when things are expected to get worse from a macroeconomic perspective, as evidenced by recent events , the company not only expects stronger sales but also stronger profitability and free cash flows. How many more ways can a company inform the investors that it is recession-proof?

This is not to say that the super wealthy did not suffer in 2022. For instance, there are 3,112 billionaires in the world today, which implies a decline of 8% from last year. This is according to M3M Hurun Global Rick Health , who also point out that total global wealth in 2022 declined by 10% to $13.7 trillion. However, this decline is expected to be temporary. According to a report by the Credit Suisse Research Institute , the world is expected to see the number of millionaires increase by 40% by the end of 2026, compared to last year.

A decline in one category of the super wealthy will not affect Ferrari as long as there is an increase in another category. Whether an individual is a millionaire or a billionaire, he/she can afford a Ferrari. Evidence of this can be clearly seen in the company’s guidance.

Strong Product Mix in 2023 and Lack of EV Worries Should Reassure Both Customers and Investors

I have always been a fan of Ferrari’s cars but none have impressed me as much as the Purosangue, the Prancing Horse’s first SUV, although the company doesn’t want you to call it that. Not only has the model been receiving raving reviews but it is also sold out for the next two years, as evidenced by the company being forced to temporarily stop taking orders for this model.

Then there’s the Daytona SP3, whose deliveries will commence this year, which is expected to contribute heavily towards the company’s FY23 revenues and underlying margins.

It looks like Ferrari also doesn’t have to worry about the EV revolution yet. As most automakers are too busy trying to get their EV strategy right, amidst a myriad of challenges, Ferrari doesn’t appear to have any such issues. While the Purosangue is expected to eventually lead the company towards electrifying its fleet, given that a Ferrari EV is not expected to hit the roads until 2025 , customers and investors do not have to worry about the challenges surrounding electrification in my view.

Valuation

Source: Refinitiv and Author’s Calculations

As mentioned earlier, the company expects to earn between 6 and 6.20 euros in FY23. The company currently trades at a forward PEG ratio of 3.3, and at a forward P/E of 39.3x, according to Refinitiv. This implies an earnings growth of 12%.

For FY23, I have assumed the higher end of FY23 earnings guidance, 6.20 euros. At an implied growth rate of 12%, this suggests that adjusted diluted EPS in FY24 is expected to be 6.94 euros. Assuming an exchange rate of $1.15 per euro, this translates to an EPS of $7.98.

At a forward P/E of 39.3x, this would translate to a price target of $314.00, which implies an upside of approximately 19% from the closing price on 22 ^nd March 2023.

Risk Factors

One of the fundamental risks facing the company is from its Formula 1 team. Last season, the team did exceed expectations, finishing second in the Constructors’ championship , although they were miles away from eventual champions Red Bull Racing. The improved performance resulted in a strong growth in the company's Commercial and Branding division despite a decline in Sponsorships. In the current season, the team is not off to the best of starts as they are currently in 4 ^th spot albeit after just 2 races. A poor performance could lead to lower revenues and earnings from the Sponsorship, Commercial, and Brand segment of the company, which could eventually hurt its overall top and bottom lines.

Then there’s the issue of the production of the Purosangue being currently limited to 20% of the overall production, which suggests that the company might not be able to fully maximize the beneficial tailwinds resulting from the launch.

Concluding Thoughts

I have been tracking RACE for a while now, especially since the company's strong performance during last year’s Formula 1 championship. This is a company that seems to have caught everyone’s attention and rightfully so. I believe the company is recession-proof, as demonstrated by its strong FY22 results. Now with the likes of the Purosangue and Daytona SP3 set to hit the roads, the growth trajectory for the company looks all the more strong despite the macroeconomic challenges. Finally, from a valuation perspective, the stock has considerable upside from current levels in my view.

While it appears that Red Bull Racing might once again dominate this season’s Formula 1 championship, outside the racing track, the Prancing Horse continues to dazzle both the super wealthy and investors alike.

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