Value Investing Ferrari : Stock racing ahead of value or growth ahead? |
- Ferrari : Stock racing ahead of value or growth ahead?
- Aldi Model vs. Other Supermarkets
- Timberland Company at 60% discount
- Do you need a strong understanding of chemistry in order to invest/analyst pharma companies?
- Does lowering corporate tax rates hurt corporate spending and reinvestment?
| Ferrari : Stock racing ahead of value or growth ahead? Posted: 01 Sep 2019 07:20 PM PDT See it also at: https://value.finance.blog/2019/09/01/ferrari-stock-racing-ahead-of-value-or-growth-ahead/ All financials are in EUR unless otherwise stated Ferrari not only sells cars; but an experience – a power rush to those who want the feeling of wealth and exclusivity. The company is at an inflection point where it scales up growth in Asia and investors have to decide whether this will come at the expense of exclusivity. Investors buying/holding today will have mediocre returns going on. Ferrari is an Italian luxury car manufacturer which is one of the most iconic brands in the world. The company was founded in 1929 by Enzo Ferrari, to race Alpha Romeos . The company started to make its own cars in 1947, and Fiat bought 50% of of in 1969 which was increased to 90% in 1988. In 2014 Fiat Chrysler decided to demerge it from the parent and the stock has had a great run since then. The Business Ferrari's business model is to manufacture extremely high quality cars and sell them for a premium price to the super rich. This business model allows Ferrari to have high margins, (52% gross vs industry average of 18.5%)* and returns on capital (18% vs industry average of 5%)*. Ferrari spends less than .5% of sales on net capex (which is far lower than the industry average of 3.3%.)* It is safe to say that Ferrari, is an outlier in a value-destroying industry. *Source: Damodaran Online The company's large profitability can be attributed to the fact that it sells cars to an extremely exclusive club of people, and charges them an extremely high price for being part of it. The company has been helped by the tailwinds of the growth of the Chinese super-rich and a strong global economy. Buying a Ferrari is not just buying a car, but gaining entry to an exclusive club of the super-rich. Ferrari not only sells cars; but an experience – a power rush to those who want the feeling of wealth and exclusivity. This exclusivity allows it to exploit the envy tendency of humans, and charge a price far beyond your average car manufacturer. The company sold cars for €278,000 in 2010, and prices per car have increased every year since then. The CAGR in price per car has been 3.6% a year indicating the strong pricing power of Ferrari. In all of 2018, the company sold just 9251 cars for an (unshockingly high) average selling price of €370,000 (US$ 411,000). The company did ~€3.42 billion in sales and made ~€826 million in EBIT which implies an EBIT margin of 24%. They sold 2671 cars in Q2 2019, at an average selling price of €362,000. 10 years after the financial crisis, with asset prices at all time highs, the super-rich seem to have had enough money to buy Ferrari cars for the past 10 years. If you have a billion dollars, and your investments go up to 3 billion, then you get a psychological boost from the increase in wealth and spend even more. This wealth effect along with the rise of the Chinese super-rich has led to a massive increase in the number of buyers who want a Ferrari. But all dreams don't come true. According to carbuyer the average waiting time in Singapore (the same city where Crazy Rich Asians was set) was 6 months for old models and 2 years for new models. Ferrari does this to maintain its exclusivity. Now where does all this get us? Ferrari is a luxury goods company with strong pricing power, low reinvestment needs and an exclusive client base. The exclusive client base implies that Ferrari is unlikely to (or even impossible to) have large increases in revenues in the developed countries, leaving us to value it as a company whose past was in the US but whose future is in Asia. Given this discussion, we can agree on one thing: The defining question is whether Ferrari can maintain exclusivity and grow? In Europe and Africa there were 4970000 HNW** individuals. 3901 Ferrari's were sold there in 2018. So 0.078% of HNW** individuals in Europe and Africa bought a Ferrari. (This is imperfect, I know. But still it will do fine for estimating the Asia TAM). In the same way 0.04% of HNWs** in Middle East bought a Ferrari. In Asia that number was 0.033% for 2018 and 0.029% in 2017**. In other words Ferrari is less than half as penetrated in Asia than Europe. It is far more exclusive in Asia than Europe. The bear case for the stock is that they will dilute the brand while scaling up in Asia. This is far from true. Ferrari can increase Asian sales by 80% and still not reach the penetration level seen in Europe. We have answered the question in the previous question, and so will move on to the next one: How much can they grow? **Source : World Wealth Report, Ferrari 20-Fs and author's calculations The answer is obvious. Given the discussion in the previous paragraphs, the answer is to sell more cars in Asia and have the penetration levels move to that of Europe/North America. This will mean an 800 to 1000 car jump depending on how much penetration goes to. If 0.05% (which is the global average of HNWs who purchased a Ferrari in 2018) of Asian HNWs (keeping HNW numbers constant) buy a Ferrari in 2020, then the company will have a 800 car boost. If it goes to European style penetration levels (0.07%) then 2700 more cars will be sold. Ferrari is obviously taking time to do this. They need time to find the right dealers and supply the cars to China and APAC. This will take some moderate capital investment, but the efforts will be worth it. Most investors aren't thinking of the TAM in this way. All the Seeking Alpha posts and the one Value Investor's Club post have no estimate of the TAM in Asia. Several investors on SA and VIC have expressed skepticism that the company can go beyond the 9k unit or 10k unit mark. But as I showed before, that wouldn't eliminate the exclusivity by any means because the company sells comparatively very little in Asia. Moreover the 10k unit mark is just a psychological barrier. The next question is:How much should you pay for this ? TTM 9560 units were sold. Lets assume that they grow 4% annually. The average selling price increases in our model at historical norms at 3.6%. Revenues are €5.13 bn in 2022 (in line with management's estimate of ~€5bn in 2022.) Assuming at 25% EBIT estimate and a 23% tax rate, then NOPAT will be €.98bn or roughly €1 bn. This company deserves a premium multiple. (The standard I use for assigning multiples to companies is from Askeladden Capital's website. See the "How do you approach valuation" section of: this. In case you are too lazy to click I'll paste the relevant part on Appendix 1.) Given that they will have strong barriers to entry and meaningful potential for earnings growth, I think it should get a 20x EV/NOPAT multiple. This translates to €19.77 billion to €20 bn in EV in 2022. Today's EV is €27.94b. If you bought the stock and held it till 2022, you will have got a -6.7% (read: minus 6.7%) annualized rate of return. Who wants that? Even with aggressive growth assumptions and a multiple at the high end of the spectrum, RACE will deliver negative returns to investors. Conclusion I agree with the bulls on every aspect except valuation. Ferrari is a great company with a great brand name, strong growth potential and pricing power. But at current prices, you will face mediocre returns. Appendix 1 (taken from Askeladden Capital's website at http://www.askeladdencapital.com/about-contact/): Assuming a debt-free company, this then equates to the following valuation rules of thumb: Undifferentiated company (GDP-like 2% growth): ~12- 13x EV/NOPAT Company with modest growth prospects. (somewhat GDP-plus growth, say 3%): ~14 – 15x EV/NOPAT. (KFY was in this bucket.) High-quality company with solid growth prospects. (meaningfully GDP-plus growth in earnings, say 4%): ~16 – 18x EV/NOPAT. Very high-quality company with strong growth prospects. (5%+ growth): ~20x EV/NOPAT, or potentially even higher. (FC and ANSS are in this bucket.) I don't own the stock, and I don't plan to initiate any positions. This isn't investment advice. I don't know your personal goals. Don't listen to random people on the internet for investment advice. Do your own homework. This is for informational purposes only. [link] [comments]  |
| Aldi Model vs. Other Supermarkets Posted: 02 Sep 2019 02:40 AM PDT |
| Timberland Company at 60% discount Posted: 02 Sep 2019 02:38 AM PDT |
| Do you need a strong understanding of chemistry in order to invest/analyst pharma companies? Posted: 02 Sep 2019 02:17 AM PDT Noticed a lot of pharma companies use technical science jargon (chemistry?) in their investing documents and I have a hard time sifting through them. Is having a strong science background fundamental in analyzing pharma companies? I've heard top execs in pharma don't even have science degrees, so it's a little confusing. What level of chemistry fluency is needed to understand everything? [link] [comments]  |
| Does lowering corporate tax rates hurt corporate spending and reinvestment? Posted: 01 Sep 2019 06:31 AM PDT If you were a CEO. And tax policy said if you spend money/invest in the business you can deduct that spending from your earnings and lower the taxable amount. Whatever money you made and keep after those deductions will be taxed at 35%. (ELI5: if you make $100 one year but you buy shit for the business and/or hire new people so you ended up spending $100 that year then....$100-$100...you owe no taxes! But if you make $100 one year and only spend $50 on the business that year, then you have to pay 35% on that $50 of cash profit you keep). Now imagine the government changes tax policy. Under these new rules you still get to deduct expenses if you choose to spend on the business, but now any money you don't spend that's kept as profits you only have to pay 20% (not 35%) on that money... The Question: Wouldn't you as CEO be incentivized to reinvest and spend more on the business with its benefit of reduced tax burden when taxes are high? (as what you don't spend you give 35% of leftover earnings to the government). BUT as corporate taxes are lowered then keeping and cashing out earning becomes more appealing as you don't have to give so much of it the government? For example imagine the office has a few photocopy machines but man that ink for them isn't cheap. $100 a pop for photocopy ink. When taxes are high the choice is spend $100 on copier ink or skip the ink and you get to keep $65 as cash after taxes. But if taxes fall to 20% then the choice becomes spend $100 on copier ink or keep $80 as cash after taxes. $65 vs $80 feels significant to me. Could lower corporate taxes hurt copier sales? (Ink is just an example could be asked for many things) TL;DR Is it possible lowering corporate tax rates leads to showing increased profits (EPS) for some business that are choosing to keep more cash profits now that these profits aren't taxed so high... BUT at the same time these higher profits come at the "expense of expenses". Companies spend less/reinvest less/cut costs in order to cash out more profits at these appealing lower tax rates? How would you think about it? Do you think lower corporate taxes hurt corporate spending and reinvestment? [link] [comments]  |
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