It's Hard to Buy a Ferrari -- and That's Good for the Stock -- Barrons.com

By Ian Salisbury

Not just anyone can buy a Ferrari.

The Italian sports car maker has long aimed to foster its image of exclusivity by selling fewer cars than the market demands. It's a strategy that limits growth but also shields Ferrari from booms and busts -- like the slowdown in China that is bedeviling other luxury auto makers.

Ferrari stock is up nearly 43% year to date, and on Friday, shares were trading at $482. J.P. Morgan thinks the stock could hit $525 by next December, according to a recent note.

Ferrari's strength comes in contrast to other luxury car brands, including Mercedes, BMW, and Porsche, which have suffered from weak demand in China -- an erstwhile powerhouse for luxury purchases.

Ferrari sells less than 10% of its cars to China, according to J.P. Morgan, as a result of management's decision to sacrifice potential growth in the name of maintaining exclusivity. "Ferrari will always deliver one less car than the market demands," founder Enzo Ferrari famously said.

The upshot is Ferrari sells only about 14,000 cars a year, a figure it plans to grow "in the low single digits range going forward," according to J.P. Morgan. Instead, profit growth comes from improving margins, with some new models selling for 20% to 30% more than previous versions. Ferrari customers don't seem to mind, with wait lists that stretch for 24 to 30 months.

Big unmet demand makes it easy for Ferrari to shift deliveries from China to other markets "resulting in no negative impact on company profits" predicts J.P. Morgan.

That said, Ferrari stock does face potential headwinds. Shares trade at 58 times earnings. That isn't far below Tesla's 62 times and an order of magnitude above Mercedes, which trades at 5 times.

And it remains an open question whether classic race car brands can maintain their cachet as the auto market adopts electric vehicles, where battery life and driver software count more than horsepower.

J.P. Morgan's report makes a valiant attempt to address those risks.

"In one indication that the pace of innovation had begun to accelerate, Ferrari has filed more patents in the last 3 years than in its first 74," write analysts.

That may be so. But patents won't necessarily save Ferrari if the next generation of car enthusiasts becomes more interested in computing power than the big, loud engines older car buyers prize.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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October 18, 2024 15:24 ET (19:24 GMT)

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