Innovative Growth And Critical Alliances Propel Future Success In The Auto Industry

Key Takeaways

• Ferrari's focus on value over volume, through a rich product mix and customization, aims to raise revenue and earnings without increasing deliveries.
  
• Diversification into electric vehicles and strategic partnerships for high-performance manufacturing and innovation bolster future growth prospects and brand image.
  
• Dependence on high-margin models, premium pricing, innovation for competitive edge, shifts in geographic sales, and costs for new facilities may risk revenue and margins.

Catalysts

Through its subsidiaries, engages in design, engineering, production, and sale of luxury performance sports cars worldwide.

• Ferrari's strategy of prioritizing value over volume, evidenced by flat deliveries with double-digit revenue growth due to a robust product mix and strong trend in personalization, is expected to boost revenue and earnings.
  
• Continued innovation and the launch of highly anticipated models, such as the 12Cilindri Coupe and Spider, with significant positive feedback and strong pre-orders, are likely to enhance brand desirability and support future revenue growth.
  
• Strong profitability with a noteworthy EBITDA and healthy industrial free cash flow generation highlight efficient operations and financial health, which could lead to improved net margins and earnings.
  
• Expansion into electrification, marked by the inauguration of the new e-building for crafting dedicated electric axles and batteries, points towards future growth opportunities in the electric vehicle market, likely affecting revenues and diversification of product portfolio.
  
• Strategic partnerships, including the renewed agreement with SK On for high-performance cell manufacturing and the multiyear collaboration with HP, highlight Ferrari's commitment to innovation and sustainability, potentially opening new revenue streams and enhancing brand reputation.

Assumptions

• Analysts are assuming Ferrari's revenue will grow by 7.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.4% today to 22.7% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $9.58) by about July 2027, up from $1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 68.8x on those 2027 earnings, up from 52.9x today. This future PE is greater than the current PE for the US Auto industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 0.84% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 15.39%, as per the Simply Wall St company report.

Risks

• The reliance on high-margin special and limited editions, like the Daytona SP3, to boost revenues and profitability could pose risks if consumer interest wanes or market conditions affect demand, potentially impacting future earnings.
  
• The exclusive and premium pricing strategy for new models, such as the 12Cilindri, while currently successful, may limit market expansion and sales volume, affecting revenue growth in broader economic downturns.
  
• Dependence on innovation and the successful filing of patents for competitive advantage could pressure R&D budgets, impacting net margins if developments do not yield expected marketable technologies or products.
  
• Geographic sales distribution adjustments, particularly reductions in allocations to markets like China, might limit revenue growth opportunities in emerging luxury markets, affecting overall revenue.
  
• The construction and operational costs associated with new facilities, like the e-building for electric vehicle components, may increase capital expenditures and impact free cash flow if these investments do not yield expected returns or market acceptance of EVs lags.

Valuation

• The analysts have a consensus price target of $445.4 for Ferrari based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $519.14, and the most bearish reporting a price target of just $306.21.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $7.7 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 68.8x, assuming you use a discount rate of 15.4%.
  
• Given the current share price of $420.71, the analyst's price target of $445.4 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.