(C) Reuters. Ferrari: Strong Brand, Competitive Advantage
Ferrari (NYSE:RACE) is an iconic company with a rich history.
Many dream of one day owning a Ferrari because of the prestige the name carries, in addition to the high performance. The company designs, engineers, produces, and sells luxury performance sports cars.
In addition, it licenses the Ferrari brand to various producers and retailers of luxury and lifestyle goods.
Although the company is great, we remain neutral on the stock at current prices. (See Ferrari stock charts on TipRanks)
Measuring Its Competitive Advantage
Ferrari is a world-renowned brand. It’s not just a car company, it’s also a status symbol for those who want to portray an image of wealth and success.
We can measure Ferrari’s competitive advantage by comparing its earnings power value to the value of reproducing the business. Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value can be measured using total asset value. If earnings power value is higher than reproduction value, then a company is considered to have a competitive advantage.
Ferrari’s average EBIT margin over the past five years was 22.4%. Using its revenue for the last 12 months, its adjusted EBIT is as follows:
$4.747 billion x 0.224 = $1.063 billion
Using a marginal tax rate of 18%, the after tax adjusted EBIT is $872 million.
Ferrari’s weighted average cost of capital is 8.3%. The earnings power value is $10.505 billion ($872 million divided by 0.083).
Finally, its total asset value is $7.27 billion. As a result, Ferrari has a competitive advantage because its earnings power value is greater than the reproduction value of the business.
Ferrari has been working on becoming more efficient in the past decade.
This shows up when looking at the company’s margins. Both gross margins and EBIT margins have been in an uptrend. Although margins decreased in 2020, they have rebounded in the last 12 months, with gross margins matching 2019 numbers, and EBIT margin surpassing pre-pandemic comparisons.
Therefore, if Ferrari can continue expanding its margins, it will continue seeing growth.
Furthermore, Ferrari continues to see a high number of first-time buyers. New Ferrari owners made up 60% of orders for entry-level models in the first half of 2021. The number of new first-time buyers also led to a rejuvenation of customers who are in their 40s.
Given that Ferraris are very expensive cars, most owners tend to be an older demographic. However, the surge of customers in their 40s shows that people are eager to purchase Ferraris as soon as they achieve the financial ability to do so. Therefore, as younger generations continue to grow and become more successful, Ferrari will continue to have new customers.
In addition, the number of female customers has doubled in the past four years, with Mainland China leading the growth within this demographic. Since most owners tend to be men, the increasing popularity among women increases the company’s fan base.
Wall Street’s Take
Turning to Wall Street, Ferrari has a Moderate Buy consensus rating, based on four Buys, three Holds and one Sell assigned in the past three months. The average Ferrari price target of $239.55 implies 10.3% upside potential.
Ferrari is the world’s strongest brand. However, its current price doesn’t provide a compelling margin of safety relative to analysts’ price targets.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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Ferrari: Strong Brand, Competitive Advantage