market folly

We're posting up notes from the recent Sohn London investment conference.  Next up is Dureka Carrasquillo of Canada Pension Plan who presented a long of Ferrari (RACE).


Dureka Carrasquillo's Presentation at Sohn London Conference

In 2017 the luxury car market was valued at $570bn. Estimates suggest it will grow at about 9% for the next 5 years. Ferrari sits in the category of luxury goods that is considered an ‘experience’ and that category is projected to grow at an even higher rate.

One hallmark of a luxury goods company is it is a price maker. Carrasquillo thinks Ferrari can increase the price of their cars by about 4-7% per year. During the Marchione years prices were raised regularly.

Special cars have historically been about 2% of sales but they will become a larger part of the business.  She estimates that by 2022 special cars will represent 20% of revenues. These cars which are limited editions – often 500 cars - sell for more than $1m each and sometimes sell out on the day they go on sale. Gross margins on special cars are about 3x base cars. If the number of special cars is increased in the way that Carrasquillo predicts EBITDA margins for the whole group could increase from 33% to 38%.

Another hallmark of a luxury goods player is careful management of supply. Current product capacity is about 16,000 cars per year yet only 9000 are made. In comparison, Porsche sells 25,000 to 30,00 911s per year. Carrasquillo thinks that Ferrari could increase production to 16,000 cars per year and still sell them. Ferrari intends to launch 15 new models in the next 5 years – that’s a lot more than in the past. It takes about 40 months to produce and launch a new car.

3 potential risks to the Ferrari growth thesis:

1.    Do wealthy millennials want a Ferrari? Do they even want to drive at all? There could be a demographic timebomb for Ferrari? The Ferrari sweet spot is in the 35 to 50-year-old age range. Even though fewer millennials drive during their 20s than previous generations by age 30 they catch up.

2.    Are there enough wealthy buyers? Ferrari buyers tend to be high net worth individuals with investable assets of more than $1m – this is the starting base of an entry level Ferrari customer. Ferrari only manages to sell cars to 0.5% of this group. In the ultra-high net worth bracket they have 3.25% penetration. Carrasquillo concluded that there is a good runway for growth.

3.    Changes in consumer preference. Consumers may become more environmentally conscious? They might prefer to use autonomous cars? The most bullish forecasts suggest that EVs may become 30% of the fleet by 2030. In addition, Ferrari are aiming for 60% of their new cars to be hybrid by 2022. The hybrid cars will have higher price tags and be more profitable.

Luxury goods companies with a similar financial profile to Ferrari have an average P/E 27. If you put Ferrari on that multiple it implies 60% upside. Valuing Ferrari by its cashflows, implies a growth requirement of 3.5% per annum, yet it has been growing its top line at 10% per year for the past 20 years.

There is room for further sales. Ferrari have sold almost no cars in China. Surprisingly the embedded fleet in China is less than 500 cars.

Be sure to check out the rest of the presentations from the Sohn London investment conference.