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Morningstar | Ferrari Posts Mixed 3Q Results; Management Confirms Guidance; EUR 62 FVE Maintained

Wide-moat-rated Ferrari, Formula 1 racer and maker of ultra-luxury and exotic sports cars, reported earnings per share before special items, or EPS, of EUR 0.77, missing the sell-side consensus of EUR 0.97 by EUR 0.20 but EUR 0.03 above the year-ago EPS result. Revenue was nearly flat, increasing just 0.3% to EUR 838 million while EBITDA rose 4.7% to EUR 278 million with a 40 basis point margin expansion to a healthy 33.2% versus the prior year, respectively. Excluding negative currency translation, revenue would have been 2.2% higher.

We have consistently reminded investors that, like the rich heritage of the Ferrari brand, we think Ferrari stock will regularly trade at a rich, luxury-goods-type valuation, owing to its wide economic moat. Unfortunately, the 1-star rated shares trade at a steep 66% premium to our EUR 62 fair value estimate. While we would not be averse to paying-up for a wide-moat company like Ferrari, we view this stock as too overvalued relative to our forecast for Ferrari’s healthy cash flow generation and superior returns on invested capital.

Shipments grew by 10.6% compared with the third quarter of 2017. Weaker revenue growth versus the volume increase resulted from a 21% year-over-year drop in revenue from engines sold to Maserati, in addition to the negative 2 percentage points impact from currency. In 2017, Maserati's launch of the all-new Levante SUV was in full-swing, which created a challenging comparison to the year-ago period. Also contributing to the difference between volume and revenue was an 11.4% increase in V8 models, led by the ramp-up of the Portofino, versus a 7.9% increase in more expensive V12 models.

The company confirmed 2018 operating guidance, but management increased the capital spending forecast by EUR 100 million to EUR 650 million. Even so, solid cash flow enabled management to forecast slightly better net industrial debt to less than EUR 350 million versus prior guidance of less than EUR 400 million.

Management’s 2018 guidance includes record revenue in excess of EUR 3.4 billion on shipments of greater than 9,000 compared with EUR 3.4 billion in revenue from shipments of 8,398 reported for 2017. The company guides 2018 adjusted EBITDA (before special items) to be equal to or higher than EUR 1.1 billion versus the 2017 record result of EUR 1.04 billion. We currently estimate 2018 revenue, shipments, and EBITDA at EUR 3.42 billion, 9,091 units, and EUR 1.112 billion, respectively.