Is Ferrari Really Worth $12.4 Billion?

Fiat Chrysler Automobiles is gearing up to spin off the most hallowed of its brands. Demand is likely to be very strong, at least at first. But will Ferrari shares really be worth what they’re likely to fetch in an IPO?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A version of this article was originally published on Fool.com by John Rosevear

WASHINGTON, DC — Fiat Chrysler Automobiles (NYSE: FCAU.US) is preparing for an initial public offering of its Ferrari (NYSE: FRRI.US) subsidy, with pricing likely to occur on Tuesday and the first day of trading on Wednesday. And word on the Street is that Ferrari’s shares — like everything else to do with the brand — won’t come cheap.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

$1.8 million for each of Ferrari’s annual sales?

Bloomberg reported last week that the sports-car maker’s valuation could go as high as 11 billion euros ($12.4 billion) — or about $1.8 million for each of the roughly 7,000 cars that Ferrari is expected to sell this year.

FCA plans to sell a 10% stake in Ferrari via a public offering on the New York Stock Exchange. 

But they won’t come cheap. Ferrari earned 389 million euros ($439.2 million) before interest and taxes in 2014 on net revenues of 2.762 billion euros ($3.1 billion).  At 11 billion euros, Ferrari would be valued at over 28 times its 2014 EBIT — a very hefty valuation for a carmaker.

It’s an especially hefty valuation given that Ferrari seems determined to limit its own potential for growth, for good reasons.

Is Ferrari a carmaker, a luxury-goods company, or both?

FCA CEO Sergio Marchionne — who is also the chairman of Ferrari — has said repeatedly that the company shouldn’t be valued like an automaker. Instead, he argues, it should be looked at more like a maker of luxury goods, and assigned a valuation accordingly — 20 times earnings or more, versus the roughly 10-12 times earnings that is typical for a carmaker.

There’s some merit to that, up to a point. Ferrari really is selling luxury goods. Its sales volumes are limited by choice, to preserve the brand’s sense of exclusivity: Demand always exceeds supply. The company caps sales at around 7,000 a year — and while Marchionne has hinted that the cap could be raised to 10,000 at some point, it’s not likely to go much higher.

Ferrari doesn’t really have competitors in the same way that a mass-market automaker does. People who want a Ferrari usually want a Ferrari, no matter what Porsche or other sports-car makers may be offering. It’s hard to imagine a situation (other than a protracted global economic crisis or a scandal that damaged the brand) in which Ferrari would be forced to cut prices.

But at the same time, it’s hard to see where Ferrari will find the growth that stock-investors typically demand.

A richly profitable company, but where will it find growth?

There’s probably a bit of growth to be had over time simply by boosting prices. Raising the sales cap — a little bit at a time — could also provide incremental revenue growth over several years. And Marchionne has talked of finding ways to offer other luxury goods under the Ferrari brand, although it’s unclear how profitable that line of business could be.

In truth, many investors will be attracted — at least at first — by the romance of being able to own a little bit of the greatest car brand of all. (Wall Street professionals are not immune to that romance — in fact, as a group they may be more susceptible to it than most.)

But what’s the case for Ferrari as a long-term investment? We may know more after the company starts its pre-IPO “road show”. But right now, it’s hard to see where the growth comes from — and as much as your humble Fool loves Ferrari’s cars, I’m still sceptical of the company as an investment.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 

 

More on Investing Articles

Senior woman wearing glasses using laptop at home
Investing Articles

SSE shares are up 15% since the market correction! Should I buy?

Jabran Khan looks at why SSE shares have been on an upward trajectory in recent weeks and decides if he…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

After crashing 29%, Spectris shares look cheap to me

After peaking at 4,167p last September, Spectris shares have slumped by over 29%. But I see deep value in the…

Read more »

British Pennies on a Pound Note
Investing Articles

Here is why I added this dirt-cheap FTSE 100 penny stock to my holdings!

Jabran Khan explains why he added this dirt-cheap FTSE 100 stock to his holdings and is excited by its recovery…

Read more »

Woman looking at a jar of pennies
Investing Articles

3 FTSE 100 penny stocks! Which is the cheapest buy?

Our writer examines three penny stocks that feature in the FTSE 100 index to ascertain whether they have a place…

Read more »

Arrowings ascending on a chalkboard
Investing Articles

Is the Vodafone share price an opportunity at current levels?

Jabran Khan looks at the current Vodafone share price and decides if he would add the shares to his holdings…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

4 gems I’d include in my Stocks & Shares ISA

Jon Smith explains some of the top stocks he's thinking about including in his Stocks and Shares ISA a we…

Read more »

Compass pointing towards 'best price'
Investing Articles

At 85p, are Rolls-Royce shares a no-brainer buy? 

The Rolls-Royce share price look very cheap right now. And I think this might be my last chance to buy…

Read more »

positive mental health woman
Investing Articles

My £3-a-day blue-chip passive income plan

Our writer sets out his passive income plan of investing a few pounds each day in top stocks.

Read more »