One of the first articles I read this morning as I perused the morning business news was a video review in The Globe and Mail about the 2024 Ferrari (RACE) Purosangue, the Italian sports car manufacturer’s version of an SUV.
I hadn't intended to talk about Ferrari, but the 13-minute video review got the best of me. While I’m not a car person by any stretch of the imagination, I’ve liked Ferrari’s stock since the company was spun out of the former Fiat Chrysler, now known as Stellantis (STLA), in January 2016.
There are many reasons to like Ferrari stock for the long haul. Here are two that set it apart from most major auto manufacturers.
$400,000 for an SUV Is Good
You read that right. Ferrari is charging its customers $400,000 for the obscenely fast SUV. To be accurate, Car and Driver have it starting at $402,050.
Here’s what Car and Driver has to say about the Purosangue:
“Thundering V-12 power, nicely balanced ride and handling, one of the most exclusive SUVs on sale today,” the publication states. “The Purosangue is the performance SUV that only Ferrari could build and its performance capabilities speak for themselves.”
My wife spent over 20 years in retail management, much of it hawking expensive jeans. We both concluded from her career that the mushy middle is not where you want to be as a retail brand. Companies like TJX (TJX) and LVMH (LVMUY) do just fine. Companies like Gap (GPS), not so much.
The same applies to the automotive industry.
According to a recent statistic, the average price of a new vehicle is more than $48,000. If you’re a middle-of-the-road manufacturer, you must sell more than eight vehicles compared to one Purosangue for Ferrari.
I know what you’re thinking: More people can afford $48,000 than $400,000. But can they? According to Statista, nearly 84% of new vehicles sold in 2022 were paid for with financing of some sort.
How many Purosangues will be financed? I don’t have any empirical evidence. However, I suspect that it would be very low. Those that don’t want to pay the entire nut upfront will likely lease but not because they can’t afford it.
Scarcity, when it comes to vehicles, is even more lucrative than apparel or leather handbags. Ferrari set a record in 2022, delivering 13,221 vehicles, up from 11,155 in 2021.
In 2015, before Ferrari was spun off, there were approximately 1,826 billionaires on Forbes’ annual list. In 2023, it was 2,640. Add in all of the people close to those billionaires that might be able to afford a $400,000 vehicle -- you probably could multiply the number by 100 -- and Ferrari only has to grab 5% of them.
I like its odds.
Margins Are Pretty Good
One of my favorite sources of business information is the Visual Capitalist. Although it’s based in Canada (I’m Canadian), that’s not my reason for liking it. No, it creates interesting infographics.
In February, it published an infographic about Tesla's (TSLA) unrivaled profit margins. As of Q3 2022, Tesla’s net profit per vehicle was $9,574, more than 4x General Motors' (GM) net profits.
Only one problem with the stat: It didn’t include Ferrari. If it had, investors would have learned that the company’s operating profit per vehicle sold is about 10x Tesla’s at 92,369 euros ($101,397).
Tesla has to sell 10 vehicles to generate the same profit as Ferrari gets from one.
In fiscal 2022, Tesla had revenue of $81.5 billion and an operating profit of $13.83 billion, good for a 17.0% operating margin. Ferrari’s revenue in 2022 was a measly 5.1 billion euros ($5.6 billion), its operating profit was 1.24 billion euros ($1.36 billion), and its operating margin was 24.3%.
So, despite manufacturing in Italy, a much more expensive place to make vehicles than China and elsewhere, Ferrari still made seven cents more per dollar of sales than Tesla.
Things are so good at Ferrari that it raised its guidance for the year on Aug. 2.
In the second quarter, the company’s profit jumped 33% over Q2 2022, to 334 million euros ($366.6 million), on 1.47 billion euros ($1.61 billion) in revenue, 14% higher than a year ago.
It now expects sales of $6.4 billion in 2023, 14% higher than a year ago, with an adjusted EBIT (earnings before interest and taxes) margin of more than 26%.
I’d say that’s pretty good.
The Bottom Line
According to the company’s guidance, it expects to earn at least 6.25 euros per share ($6.86) in 2023. Based on a $312.82 share price, it’s got a price-to-earnings ratio of 45.6x.
That might seem high. However, Tesla’s P/E right now is 71.1x, about 55% higher than Ferrari, which is crazy when you think about which company has greater competition. Now and in the future.
One interesting way to play RACE stock is to buy Exor NV (EXXRF). It is the holding company of Ferrari’s founding family, the Agnellis. Exor has a 22.9% economic interest in Ferrari and holds 36.3% of the votes. It also has ownership stakes in many companies, including a significant interest in The Economist.
Exor currently has a P/E of 6.6x, about one-seventh that of Ferrari. However, the over-the-counter volume is minimal, so don’t consider buying unless you plan to hold for years, not months.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
