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Slow down

11 December 2014 By Olaf Storbeck

Ferrari is more Porsche than Prada. Fiat Chrysler Chief Executive Sergio Marchionne aims to spin-off the Italian sports carmaker in 2015, and wants it to be valued like a luxury goods company, with an enterprise value of up to 10 billion euros ($12.4 billion). Fast cars, however, are harder to craft than handbags or high heels. A more reasonable price tag would not be much more than half that.

With cars costing up to 1.3 million euros, a Formula One team, a deliberate shortage of product, and its famous prancing horse logo, Ferrari is one of the industry’s shiniest names. Brand Finance, a consultancy, judges it the world’s most powerful brand.

That creates high barriers to entry. But staying ahead is expensive. And while Ferrari does have a small sideline in clothes and merchandise, it’s really all still about the cars. Each year, Ferrari spends up to a fifth of sales on capital investment and research and development. That’s above industry peers and more than twice the average outlay by European luxury goods companies such as Tod’s, LVMH, or Hong Kong-listed Prada.

That has two effects. The heavy investments carried on the balance sheet depress Ferrari’s returns on capital. Europe’s carmakers as a whole earn just half the return on capital made by luxury groups.

Secondly, research costs charged to the profit and loss account crimp margins. At 15.6 percent, Ferrari’s operating margin is about a fifth below the European luxury goods median. Ferrari beats the 10 percent margins at BMW and Volkswagen’s Audi brand, but trails the 18 percent at Porsche, another part of the VW empire.

Marchionne thinks Ferrari can lift EBITDA above 1 billion euros, and should trade on a luxury-like multiple of nine to 12 times that figure. Not quite. Daimler and BMW trade on more like four times. Ferrari’s growth potential merits a premium – of, say, 50 percent, to six times. But even then, that implies an enterprise value of 6 billion euros.

 

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