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?

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^{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.

$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.