EUR 850.00 For Business Accounts Only

Morningstar | Ferrari Posts Solid 2Q Results, Management Confirms Guidance: EUR 62 FVE Maintained. See Updated Analyst Note from 01 Aug 2018

Wide-moat-rated Ferrari, Formula 1 racer and maker of ultraluxury and exotic sports cars, reported earnings per share before special items of EUR 0.84, EUR 0.03 better than the sell-side consensus of EUR 0.81 and EUR 0.12 higher than the year-ago EPS result. Revenue skidded 2% to EUR 906 million while EBITDA jumped 7% to EUR 290 million with roaring margin expansion of 260 basis points to a breakneck 32.0% versus the prior year, respectively. Excluding negative currency translation, revenue would have been 1% higher.

Shipments grew by 6% compared with the second quarter of 2017. The revenue decline versus volume increase resulted from a 20% year-over-year drop in revenue from engines sold to Maserati, in addition to the negative 3 percentage points impact from currency. In the second quarter of 2017, Maserati's launch of the all-new Levante SUV was in full-swing, which created a challenging comparison to the year-ago period. Partially offsetting the revenue headwinds, higher sales of the 812 Superfast, the 488, and the GTC4Lusso supported favorable volume, price, and mix in all world regions. This dynamic also resulted in the impressive margin expansion versus the same period last year.

The company confirmed 2018 guidance, but our forecast is a bit more optimistic, assuming slightly better volume, pricing/mix, and operating efficiency, partially offset by higher spending on new product development. However, 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 68% 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.

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 3.65 billion, 9,035 units, and EUR 1.141 billion, respectively. However, while midterm guidance was also unchanged--adjusted EBITDA of EUR 2.0 billion and EUR 1.2 billion industrial free cash flow in 2022, as well as net industrial debt free in 2021--management had previously set expectations such that the EUR 2.0 billion adjusted EBITDA margin will be on a margin range of 33%-38%, comparable with other luxury goods companies.

However, Ferrari's new CEO, Louis Camilleri, while confirming the 2022 objectives, also described the former CEO's (the late Sergio Marchionne) 2022 business plan as "aspirational." We note to investors that our bull-case scenario fair value of EUR 83 already includes margin assumptions within management’s indicated 2022 range, but four years earlier than management’s objective.