Our stock of the week poll asked our Twitter followers to choose from a range of companies reporting in the last few days. This week it was a close race between Japanese computer games company Nintendo (7974) and Italian luxury car firm Ferrari (RACE), but “the prancing horse” has made it across the line. Ferrari is closely associated with Formula 1 and the red sports cars that cost around the price of the average UK house (£271,000 as of July). It’s clearly an iconic brand but are the shares a good investment?
Ferrari traces its history back to before the second world war but made its public debut on the stock exchange in October 2015, when shares were priced at $52 in New York. Since then they have motored upwards to $257 (or €228 for the European listing). Morningstar autos analyst Richard Hilgert thinks the shares are pretty racy in terms of valuation too, assigning the stock a 1-star rating and a fair value of $131 or €113. He assigns Ferrari a wide economic moat because of its brand strength and perception that its cars are only accessible to the truly wealthy, whose numbers are growing globally every year. “The evidence of Ferrari's economic moat stems from stable growth throughout economic cycles, pricing power, consistently high profitability, and a brand that captures the imagination of many around the world, but a price that only high-net-worth individuals can afford,” Hilgert says.
Ferrari has just put out quarterly results, with numbers ahead of expectations, leading the company to revised its full-year profit forecasts. Quarterly results are usually not that revealing, but this report had some interesting insights into where sales are coming from: shipments to China doubled in the last three months (from Q3 2020), and were 40% higher to the Americas.
Ferrari shipped 2,750 cars in the three months ended September 30, 2021, up from 2,313 in the same period the year before. That breaks down to 1,308 for EMEA, 706 in the Americas, 249 to mainland China, Hong Kong and Taiwan, and 487 to the rest of Asia Pacific. Asset prices, from crypto to stocks to housing, are at record highs across the world so the ranks of the super-rich are swelling every year. Covid-19 slammed the brakes on this growth, temporarily, but Hilgert argues that ultra-luxury goods are recession-proof. Founder Enzo Ferrari said, "The Ferrari is a dream – people dream of owning this special vehicle and for most people it will remain a dream apart from those lucky few." But the demographic changes and fortunes being made in emerging markets especially will keep that dream alive for many.
If you’re a Formula 1 fan or lover of fast cars generally, but are put off by Ferrari’s rich valuations, there are alternatives. Volkswagen (VOW3) may seem a more pedestrian choice, but the wider group contains some luxury names including Bentley, Bugatti, Porsche, and Lamborghini. Volkswagen is at the opposite end of the valuation scale, according to our analysts, with a 5-star rating, with shares trading around 40% below their fair value. As discussed in a recent video, Grand Prix fans can also choose Daimler (DAI), home of the Mercedes F1 team, which is currently above Ferrari in the 2021 constructors’ championship. As Hilgert says, Daimler is less of a “pure play” on motorsports than Ferrari but is more attractively valued.
EV Sports Cars Aren't Cheap
Stricter environmental investors may swerve hard to avoid stocks like Ferrari, but most carmakers, even luxury ones, are battling to produce hybrid or electric models to satisfy the demands of climate conscious consumers. (The Ferrari SF90 Stradale is the company’s first Plug-In Hybrid Electric Vehicle, starting price $507,300 for the basic model). The Formula 1 industry is by its nature carbon intensive but has, like others, announced net zero targets. The company’s latest earnings release warns the cost of moving towards hybrid and pure electric vehicles will weigh on profits in the coming years--an issue faced by carmakers across the industry, not just Ferrari. Sustainalytics gives Ferrari an ESG Risk Rating of Medium, below the industry average, and says the company has strong ESG reporting practices, with board level responsibility for overseeing them.
A Morningstar/Sustainalytics report called “Human Capital” looks at employee welfare and labour relations as a key part of the “S” and “G” of ESG. The report notes that Ferrari has a unionised and diverse workforce, which are key pillars in ranking highly from an ESG perspective. But the report’s author, Adam Fleck, acknowledges the investor’s dilemma when it comes to unions. “Some commonly believed truths about the negative financial impact from unions seem to be borne out. Companies with higher percentages of employees covered by collective bargaining agreements have generated lower historical returns on invested capital and are less likely to have economic moats. However, we also see some upside potential from higher unionisation relating to work safety and employee development, which could arguably translate to positive financial outcomes,” Fleck says.
As an investor, a unionised workforce may make a difference between whether you put your money into a company, but Fleck argues it’s vital companies are transparent about their labour relation policies. The high profile push by Amazon employees to unionise in the US suggests this is a live issue for customers and investors alike.
