DePaul University- FIN 380 Ferrari: Valuing the Prancing Horse Case # 8
Kelsey Fitzpatrick
Sandra Hernandez
Zain Malik
Leanne Aleisawi
Table of Contents
Page
Executive Summary 3
SWOT Analysis 4
Ferrari’s Brand Value/Equity 4
Primary Market for Ferrari Sales 5
IPO 7
Ferrari’s Challenges 7
Challenges Facing Ferrari’s Success as a Publicly Traded Company 8
Ferrari’s Gross and Operating Margins Compared to its Competitors 9
Key Variables of Most Critical Interest for Ferrari’s Valuation 9
Fundamental Principles DCF Valuation 10
Relevant Range of Values for Ferrari’s DCF Valuation 10
Comparative Analysis 14
Recommendation 15
Works Cited 17
Executive Summary
FerrariEnzo , an he Italian automotive engineer, worked for years with Alfa Romeo as the
director of the Alfa Corse racing division.
brandsinnovationperformanceIn 1939, Enzo left Alfa Romeo after deciding to start up his
own firm. Later on, Ferrari was founded in 1947 which became known for its world-class
Sports Car Manufacturing. It is one of the world’s leading luxury . The brand symbolizes ,
Italian design and engineering heritage, exclusivity, and state-of-the-art sporting .
The company is closely associated with Formula 1 racing team, Scuderia Ferrari. Since 1950
the team has won 224 Grand Prix races, 16 Constructor World titles, and 15 Drivers’ World
titles and over 5,000 races worldwide.
marketsToday, Ferrari designs and produces the cars in Maranello, Italy, and sells it in more
than 60 globally.
SWOT Analysis
Ferrari’s Brand Value/Equity
Brand equity refers to the importance of a brand in the customer's eyes, while brand value
is the financial significance the brand carries. In other words, intangible assets. Both brand
equity and brand value are educated estimates of how much a brand is worth. The art
behind Ferrari and its powerful stature in the market, is driven by its brand value and brand
equity as they both go hand in hand in their case. Though consumer loyalty and racing
heritage are two key drivers to Ferrari’s brand equity, since Ferrari is a luxury item it can be
difficult to turn its logo and unique background into monetary value.
In a cost-based brand valuation (2013), we consider the value of anything that consumers
associate with your brand and image, such as your trademark, brand name, visual assets
such as a logo or colors, unique marketing strategy, digital assets or licenses, and level of
customer loyalty. Exhibit 2 in 2013 states sponsorship, commercial, and brand as 17.6% of
sales revenue (€412m or $458,520,980). In Appendix 2 in 2013, intangible assets (including
trademarks, copyright, etc) at € 242,167 ($269511.29) and goodwill at €787,178
($875,668.61) pricing their brand at a total of $459,666,160.
A low-volume production strategy pursued by the company maintains its reputation for
exclusivity and scarcity. Ferrari was considered the world’s most powerful brand, but not
necessarily the most valuable.
● Consumer loyalty
● Pricing power
● Racing heritage
● Development and production
● Financial performance and profile
● Exclusivity
Can Ferrari propose a dividend?
One way Ferrari could maintain the exclusivity of its value is to propose a dividend payout to
its shareholders in substitute for any lack of growth in the company. In Exhibit 7 Ferrari’s
Market Value in Multiples, Ferrari shares the same Price per Earnings in the year of 2016.
While Hermes pays a 1% dividend, Ferrari pays 0% with a lower price to sales ratio yet
higher price share. According to the dividend discount model, a dividend payout of $5 per
share at a 1% dividend yield, price share would increase to $50 per share becoming more
competitive in the market and increasing value in the company’s stock.
5/.1=$50
Why go public?
Since Ferrari was such an “eye candy” in the auto market, Ferrari saw the opportunity to
increase both value and earnings to compensate existing owners, ei. Fiat. Their first move
after going public was not to reinvest shares but to increase their leverage. There is a
possibility that Ferrari forecasted a default due to low production and exclusivity.
Primary Market for Ferrari Sales
strategy targeting target Ferrari has positioned itself as a luxury sports car Maker Company
closely associated with some of the renowned racing events worldwide. The brand uses
value-based positioned to provide the owner a sense of pride of owning such a luxurious
car. That being said, the brand uses selective since the company doesn’t want everyone to
own the brand (due to the value and power it provides a person through its core pillars),
therefore, it does a background check and its customers are the famous personalities,
celebrities globally and wealthy people. Hence, the premium and luxury products are
targeted to the customers who value the essence of the brand and associate themselves
with the persona of the brand. The customers of the brand Ferrari are very rich and wellknown personalities of the world who themselves are the celebrities and want to have some
exclusive luxury sports car.
Ferrari’s Challenges
● Ferrari had great margins (45.5% Gross Margin more than double any other automobile
company) however, the challenge that arises is whether they can maintain such margins or
not.
● Small product portfolio which means less diversification which can be a problem
● It is a powerful brand but not most valuable
● Low volume strategy (limited growth) - such business model eliminates the possibility of
employing certain technological solutions and limits their sales volumes even if demand was
high. That being said, because they are classified as a small volume manufacturer, they are
subject to less stringent emission requirements both in the U.S (because they sell less than
10,000 units globally) and the EU which limits their ability to grow.
● They also have a “waiting list” policy, which might make them lose customers to other
competitors.
● A big challenge is fuel efficiency and emissions which are growing in importance everyday.
● Automotive industry is considered to be a cyclical industry meaning it's sensitive to the
business cycle.
IPO
An initial public offering (IPO) is the process of offering shares of a private corporation to
the public in a new stock issuance. Public share issuance allows a company to raise capital
from public investors. A company planning an IPO will typically select an underwriter or
underwriters. They will also pick an exchange in which the shares will be issued and then
traded publicly.
Before an IPO, a company is usually considered private. As a private company, the business
expanded with a relatively small number of shareholders which includes investors, founders,
etc. An IPO provides the company with access to raising a lot of money. This gives the
company a greater ability to grow and expand. On October 20, 2015, Ferrari’s IPO was a
success.
Advantages of an IPO
● The company gets access to investment from the entire investing public to raise capital.
● Facilitates easier acquisition deals (share conversions).
● Increased transparency that comes with required quarterly reporting can usually help a
company receive more favorable credit borrowing terms than as a private company.
● secondary offerings A public company can raise additional funds in the future through
because it already has access to the public markets through the IPO.
● Public companies can attract and retain better management and skilled employees
through liquid stock equity participation (e.g. ESOPs).
● cost of capitalIPOs can give a company a lower for both equity and debt.
● Increase the company’s exposure, prestige, and public image, which can help the
company’s sales and profits.
Challenges Facing Ferrari’s Success as a Publicly Traded Company
● Promised earnings in the company
● Exclusivity - no dividend offered
● Profitability to drive share price
Ferrari’s aim was to achieve profitable growth by pursuing ‘controlled growth in developed
and emerging markets’. One of the drawbacks associated with going public was that the
capital raised was not targeted at reinvestment into the business, but to compensate
existing owner, Fiat, for reducing its interest. Ferrari also had no plans to offer dividends, so
its value proposition relied exclusively on hoped-for capital gains. Investors would expect
double-digit rates of return. Fundamental factors drive stock prices based on a company's
earnings and profitability from producing and selling goods and services. Profitability is
driven by increased turnovers, productivity and efficiency.
Ferrari’s Gross and Operating Margins Compared to its Competitors
In the examination of Ferrari finances, a few numbers stand out. First, the Ferrari portfolio
consisted of eight vehicles in their product portfolio. Compared to other automakers, a
portfolio of eight cars is relatively small. Though Ferrari had only eight vehicles in their
product portfolio, it accounted for 70% of total revenue generation. Also, the financial
statements showed the extremely high spending on Research and Development that Ferrari
engages in. Ferrari research and development in terms of percentage of sales was 20%,
whereas other automakers such as the luxury car brand Porsche averaged around 11%. The
global automaker industry typically averages 5% on research and development. Another
point that stands out in Ferrari finances is the “Silicon Valley” level of gross margin. Due to
the luxury automaker's desire to have first class pricing long with a minimalist approach to
the cost structure, the gross margin is specially astronomical. For example, Volkswagen,
General Motors, and Toyota have a gross margins of 18.0%, 11.4%, and 22.2% respectively.
Ferrari stands out at an outstanding gross margin percentage of 45.5%, more than doubled
of any global automaker. Due to such a large gross margin, the operating margin is also high
for Ferrari. On top of having the highest gross margin in the industry, Ferrari holds the
highest operating margin as well which sits at 14.1%. Between the two margins (operating
margin and gross margin), there was a 31%. With the combination of small product
portfolio, high spending in research and development, and need to have a premium pricing
with minimalist cost structure has led to Ferrari being able to achieve high gross and
operating margins.
Key Variables of Most Critical Interest for Ferrari’s Valuation
When looking at Ferrari valuation, certain critical factors should be looked into. One of
these critical factors is volume growth. Ferrari strategy involves low production of
automobiles due to the company desire to be exclusive and uncommon. From 1997-2014,
the automaker averaged around 4.4% growth per year. Compared to other automakers, a
growth rate of 4.4% Is very small. In terms of scarcity, it has had positive and negative
effects for Ferrari. The positive was that the High Net Individuals who are the focus for
Ferrari has grown 8.6% per year however on the flip side, a 4.4% growth rate is not very
promising if sales and earnings did not keep up with the rate of vehicles produced. Outside
of volume growth, R&D is another component to look out for during valuation. Ferrari
spends a massive amount of money on the research and development department. Most
automakers average around 5% but Ferrari sits at 20% for R&D expenses as percentage of
sales. Cost of capital is another factor to keep a lookout for during Ferrari valuation because
it provides information on the amount necessary for specific investment growth. These are
certain factors that should be considered when doing valuation for Ferrari.
Fundamental Principles DCF Valuation
The fundamental principles of a Discounted Cash Flow Valuation are to value a company
based on the cash flows it will create in the future. This will, in turn, create value for the
shareholders. An investor takes on the risk of purchasing shares of a company in hopes that
their value will increase in the future. The value of future cash flows calculate to the present
value of the company today. The DCF valuation uses a discount percentage known as the
WACC to discount the future cash flows to bring them to present value.
Relevant Range of Values for Ferrari’s DCF Valuation
https://maildepaulmy.sharepoint.com/:x:/g/personal/sherna69_mail_depaul_edu/EaRF8XC_UEFNuPS3UX8Ux0B2PK1Xy0Mfe5Jg-zoafc8nw?e=FVo7jS
In all scenarios, Ferrari maintains their above average margins. This is due to their low
production and extremely high costs for their vehicles. While it may be of benefit to
themselves as a private company, the shareholders who invest in their equity will be
expecting a return on their investment in the long run.
Downside Scenario NPV: $7,971 MM ($8B) Price per share: $39.21
Sales
Volume growth: 3%
Price growth: 1% Revenues
Engine sales to Maserati and rentals: 2% Sponsorship, commercial, and brand: 2% Other F1
and financial income: 1% Costs COS: 3% SG&A: 4% R&D: 3% CAPEX: 2% Margins at Y2025
Gross: 57.1% EBIT: 30.2% Base Scenario (as mentioned in the case) NPV: $11,148 MM
($11B) Price per share: $56.02
Sales Volume growth: 4.4% Price growth: 2% Revenues Engine sales to Maserati and rentals:
3% Sponsorship, commercial, and brand: 3% Other F1 and financial income: 1% Costs COS:
2% SG&A: 2% R&D: 2% Margins at Y2025 Gross: 61.8% EBIT: 40.4%
Upside Scenario NPV: $12,610 MM ($12.6B) Price per share: $63.75
Sales Volume growth: 6% Price growth: 4% Revenues Engine sales to Maserati and rentals:
4% Sponsorship, commercial, and brand: 4% Other F1 and financial income: 4% Costs COS:
1% SG&A: 1% R&D: 2% Margins at Y2025 Gross: 64.5% EBIT: 44%
Comparative Analysis
Multiples
Price- to Earnings (P/E):
As shown on Exhibit 7 in the case study, dated January 21, 2016
Consensus 2016 EPS est: $1.86
→ $34.97 PPS* 189 shares outstanding= $6,609 MM ($6.6B) Valuation
Using the current Price- to- Earnings multiple, the estimated share price is similar to the
share price given by the discounted cash flows. This is due to Ferrari being seen as a value
company, hence the high valuation multiple. When using the forward earnings, however, we
get a completely different target share price of $34.97. This target price is a more realistic
value of each share of equity by basing off their future earnings per share as according to
consensus of analysts covering this IPO. The forward P/E ratio is more realistic because it is
not basing the value of the stock off of luxury appeal but rather by actual potential earnings.
EV to EBITA (EV/EBITA):
As shown on Exhibit 8 in the case study, Ferrari’s multiple (EV/EBITDA) compared to other
European luxury brands
Comparative multiple: Ferrari: 11.4x, Group average: 12.1x 2016 consensus EBITDA est:
$880 MM
European Luxury Peers Average (12.1x)
→ (($880*12.1x)/189) = $56.34 price per share
→ $56.34 PPS* 189 shares outstanding= $10,648 MM ($10.6B) Valuation
Ferrari (11.4x)
→ (($880*11.4x)/189)= $53.08 price per share
→ $53.08 PPS* 189 shares outstanding= $10,032 MM ($10B) Valuation
When valuing Ferrari as a luxury brand as opposed to an automobile maker, the valuation of
each price per share is similar to the target price given by the baseline discounted cash flow
analysis. This shows that the company is valuing itself as luxury rather than as an
automotive stock. While this may certainly bring investors, they will eventually realize that
this stock was purchased more as “equity eye candy”. Unless the company begins to mass
produce like other automobile
makers, or at least increase their production significantly, they will not be seeing a good
return on their investment.
Recommendation
● Increase their product line maybe by manufacturing electric cars. This will help save the
economy (eliminates the regulatory limitations of emission and mileage).
Sales of plug-in electric vehicles grew by 79 percent between 2017 and 2018. That being
said, electric cars are slowly taking over the market so it would be a smart move for Ferrari
to consider adding electric cars to their product line with their unique and powerful brand.
Also competitors like Lamborghini and Porsche are expanding their product range to high
performance SUV’s wherein Porsche has already been very successful with its “Cayenne”
model, all over the world.
● amusement parkYas IslandAbu DhabiUnited Arab EmiratesFerrarispace frameFerrari
World is an on in , . It officially opened in November 2010. It is the first -branded theme park
and has the record for the largest structure ever built. Ferrari World opened in the Middle
East which only comprises 8.44% of its unit sales. That being said, possibly opening another
location in a different country with a bigger population can possibly provide Ferrari with a
different source of income, plus it would be a good publicity of the Ferrari brand by reaching
out to a bigger consumer.
Works Cited
Bhasin, Hitesh. “Marketing Strategy of Ferrari - Ferrari Marketing Strategy.” Marketing91, 21
Mar. 2018, www.marketing91.com/marketing-strategy-ferrari/.