The company unites autos and luxury in a way that makes rivals feel down-market, and its exposure to China's economy is more limited. By George Glover
Ferrari is synonymous with the "rosso corsa" red on its supercars -- and right now, investors in Ferrari are seeing red as well. But after a recent decline, the stock may be getting ready to rally again.
At first glance, shares of the Italian auto maker, which are up nearly 28% in 2024, have done just fine, especially compared with other luxury goods and high-end car makers. LVMH Moët Hennessy Louis Vuitton and Gucci owner Kering have fallen 21% and 45%, respectively, while Mercedes-Benz Group has declined 21%, as weak consumer spending in China drags on their sales.
But with Ferrari down 13% since the end of August, it's fair to wonder if similar troubles have caught up with the company. Investors needn't worry -- Ferrari still trumps furs and fragrances. With its million-dollar cars, it unites autos and luxury in a way that makes others feel downmarket, while its exposure to China's faltering economy is more limited. What's more, the Maranello-based company's latest car, the $3.8 million F80, is set to deliver a significant earnings boost that could help Ferrari shares gain 30% from here.
Ferrari's success begins with where it sells cars. China, Taiwan, and Hong Kong accounted for just 8% of Ferrari shipments over the first nine months of 2024 -- for Mercedes, it was 35%. That means that even though Ferrari's China shipments are down 22% this year, single-digit growth in other regions has led to earnings growth.
There are reasons for the underexposure. Ferrari feels that would-be buyers in China still need "more time to know and get acquainted with our brand," chief marketing and commercial officer Enrico Galliera tells Barron's. He adds that it was hard to compare China with other markets, given its high level of taxation on luxury goods. Beijing introduced a 10% levy on supercars in 2016, and in October its ministry of commerce said it was considering hiking tariffs on some imported vehicles.
It's worth noting that the 85-year-old company entered China in 1992. LVMH opened its first boutique in Beijing the same year -- and the region containing China has become the French conglomerate's biggest market, making up more than 30% of its revenue.
But Maranello has always been careful not to flood the zone with its wares. Founder Enzo Ferrari often pledged to "always deliver one car less than the market demands," reflecting the tight control on shipments that has helped maintain the brand's cachet. "What we do in China is more or less the same as other markets. We never want a huge influx of cars if demand just isn't there," says Galliera.
Granted, there's a chance the blessing of low exposure to China turns into a curse. Beijing has unveiled numerous stimulus measures in a bid to boost growth, and there could be more to come. If that causes China's economy to blow hot again, Ferrari's lack of presence there could leave it trailing its peers.
Valuation could be another speed bump. The stock fetches 48 times future earnings -- higher than its beaten-down rivals, although that figure was as high as 51.5 in October. Shares dropped in November despite a third-quarter earnings beat: Investors are so used to outperformance they were expecting a year-end guidance hike. The stock now trades at the valuation it had back in February.
But a once-in-a-generation new model means dips like that are a buying opportunity. Ferrari unveiled the F80 in October. It should help shares to keep lapping the field even if Chinese consumer spending rebounds.
The F80 is hardly a humble station wagon. It has a top speed of nearly 220 miles an hour and goes from zero to 125 miles per hour in under six seconds. Its engine runs off tech used in Formula One.
It should appeal to investors as well as car fanatics. Ferrari has already filled its order book for all 799 F80 cars and is set to start shipping them late next year, when sales of the near-$4 million model will start showing up in earnings reports. Analysts expect earnings per share to grow 10% to 8.89 euros ($9.34) in 2025.
Just how big the boost is depends on the F80's margin, which Galliera says would be "top of the offering" among Ferrari's cars.
Wall Street is bullish, too. Anthony Dick, who covers the automotive sector for the Paris-based private bank and asset manager ODDO BHF, tells Barron's that margins on the F80 are likely to be so high that it could account for 2% of units sold but 20% of all profit.
Red-hot demand for the supercar shows Ferrari's "best-in-class pricing power," speaks to the brand's cachet and loyal customer base, and signals it will carry on dodging the slowdown plaguing other car and luxury-goods makers, he says. Since the F80's unveiling, Dick, who rates the stock a Buy, has raised his price target on the Italy-listed shares to EUR475 from EUR445, implying it could climb 15% from current levels.
He's not alone. Half the analysts covering the stock rate it a Buy, and just 8% have it at Sell despite this year's rally. Some have even loftier price targets -- the Street's biggest bull, Evercore ISI's Michael Binetti, argues that Ferrari's U.S.-listed shares could jump 30% to $565 thanks to the F80.
At nearly $4 million, owning the supercar might be a pipe dream. Buying Ferrari stock could be the next best thing.
Write to George Glover at george.glover@dowjones.com
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(END) Dow Jones Newswires
November 29, 2024 21:30 ET (02:30 GMT)
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