Despite the weight of parent company Fiat Chrysler Automobiles N.V.’s (NYSE:FCAU) debt, Ferrari can expect a strong IPO on October 12, 2015. Bloomberg suggests it will trade the Maranello-based carmaker will make its Wall Street debut to the tune of $12.4 billion based on discussions between banks and potential investors. According to this, the company’s IPO will start off from a minimum threshold of over $10.0 billion. FCA is only floating 10% of its Ferrari shares, retaining full control.
This means that while Ferrari’s IPO should generate considerable upside, Fiat-Chrysler stock, which was trading 1.2% higher today, will also see large gains after reaching a new labor agreement with the United Auto Workers (UAW). This is the largest union in the U.S. automotive industry, averting a much-rumored strike.
FCA’s new labor agreement is preliminary. But on Friday, October 9th, local UAW representatives were meeting to discuss the agreement ahead of a vote. The terms of the accord were not disclosed because the workers have yet to express their vote. Nevertheless, there is optimism from UAW president Dennis Williams, who said the “agreement […] addresses our members’ main concerns over their jobs and their future. We have made significant gains and I cannot wait to discuss the terms with our members.”
The deal on the offer provides for an increase of wages—a gradual elimination of the controversial two-tier pay structure first introduced in 2008 in the wake of the financial collapse. The strike by FCA Group floor workers threatened to affect several of the company’s 37 plants in the United States.
Fiat Chrysler employs 40,000 UAW members. Williams will now have to convince FCA employees to approve the agreement so it can serve as a template to launch negotiations with Ford and General Motors. In being the one to set the terms, Fiat has gained an advantage over its competitors. What’s good for FCA isn’t necessarily good for the other big Detroit automakers.
The gap between FCA stock, the auto industry, and components index after news of the Volkswagen emission cheating scandal broke out has reduced Fiat-Chrysler gains. These gains should rise further thanks to the Ferrari IPO.
Fiat Chrysler’s CEO Sergio Marchionne has been saying for some time that the right way to assess Ferrari is to consider it less a car company, in the sense of a Fiat or a Toyota, and more as a luxury product such as Louis Vuitton or Cartier. This is the little secret behind Ferrari’s New York listing, under the name FRRI, since luxury good companies often trade up to 20 times higher than earnings.
And if Tesla Motors, Inc. (NASDAQ:TSLA) can trade at over 35 times book value, still operating at a loss, and likely unable to meet its reduced sales targets of 48,000 cars for this year; surely the highly profitable Ferrari should be good for at least a doubling before the end of the year. This is especially true if its Formula 1 team scores a few more wins before the end of the championship.
Certainly, few investments in the stock market, real estate, or art have paid off as much as Ferrari automobiles. If you bought a Ferrari GTO in 1962 for about $10,000, you could sell it today for over $25.0 million. The percentage gain calculation, taking into account all the inflation you want, still defies logic. True, some Picasso paintings have sold for more than a GTO, but they don’t look or sound as beautiful and you can’t drive a Picasso down the highway. Ferrari is simply in a league of its own. It’s part engineering, part art, and a lot of magic, as Bloomberg’s brief history of the company shows.
Some of that magic has rubbed off on Fiat Chrysler. While the automobile industry as a whole has inevitably been affected by the Volkswagen emission scandal, the so-called “Dieselgate,” last September 18th, shares of automotive and related components stocks have fallen. Fiat Chrysler stock was the exception, driven by the Ferrari IPO rumors.
Ferrari could end up being valued at 12 or 14 times its 2015 EBITDA, which could be well over $700 million. Last year it reached 693 million euros (about $750 million), with 25% sales margins. Profits rose by 8.9% in the first half of the year.
Ferrari benefits from its exclusivity, dictated not only by the cost of the car but also by the fact that the company, unlike Porsche, will not produce more than a certain threshold. Last year the limit was set at 7,000 cars, which could rise to 9,000 between now and 2019. (Source: “Ferrari said to push for $12.4 billion valuation in IPO,” Bloomberg, October 8, 2015.)