Should Investors Bet on a Ferrari IPO?
The Ferrari SpA (NYSE:RACE) roadshow with investors, launched on October 12, continues ahead of the company’s upcoming initial public offering (IPO) with a New York Stock Exchange (NYSE) listing. The only question now is whether Ferrari stock will be as good of an investment as its cars. My view: definitely!
Rumors suggest Ferrari shares will begin trading next week with an expected IPO date of October 21 under the ticker “RACE.” This week, some investors were invited to Ferrari’s headquarters in Maranello, while company president and CEO of parent company Fiat Chrysler Automobiles NV (NYSE:FCAU) Sergio Marchionne made his pitch for the listing in London. Early next week, the roadshow moves to the U.S. for the last stages.
Ferrari is a special company. Investors will inevitably include many fans of the famous red cars, icons of automotive beauty and performance on and off the track. Just as many purely speculative investors have purchased classic Ferraris. Ferrari stock should appeal to the company’s fans and traditional investors alike.
Until this month, the only way for outsiders to invest in Ferrari was by having several million dollars in disposable income, enabling the acquisition of one of the company’s classic cars. Few people know that classic cars have their own value index just as industrial and business conglomerates have the Dow Jones; it’s called the Historic Automobile Group International (HAGI) Top 50 index. (Source: “Vintage Cars Overtake Art on Luxury Asset Racetrack,” Artnet News, August 21, 2014.)
The HAGI Top 50 is not just for any “old” car; it is for historic cars with a high value. These are objects for the super-rich who not only wish to have a vehicle with a pedigree—in Ferrari’s case, a racing pedigree such as having won the 24 Heures du Mans race—but one capable of multiplying their investment.
The list of cars able to meet the HAGI Top 50 requirements is thin and includes such marquees as Rolls Royce, Mercedes, Lamborghini, Porsche, Maserati, Alfa Romeo, and Bugatti, to mention a few. Over the past 35 years, the prices of classic cars on the New York Stock Exchange have risen five times higher than the S&P 500. Indeed, on average, every dollar invested in 1980 to today in a HAGI-approved vehicle has appreciated by a factor of 100. By comparison, the same U.S. dollar invested on the S&P 500 for the same 20 years has yielded a return, on average, of a factor of 20.
This is a huge gap, which itself was shattered by a 1963 Ferrari GTO, sold at auction for more than $38.0 million in August of 2014. Noted British automobile collector and TV host Chris Evans said that the Ferrari 250 GTO is like the “Mona Lisa” and is simply the best possible investment of any type; indeed, considering the GTO cost $18,500 new between 1962 and 1964. (Source: “Chris Evans: Why the Ferrari 250 GTO is the best possible investment,” The Telegraph, November 7, 2008.)
Should Investors Be Bullish on This Ferrari IPO? Yes!
There is no more iconic a brand than Ferrari. The fact that its cars continue to fetch prices worthy of the late astrophysicist Carl Sagan’s trademark “millions and billions” is a useful indicator of the company’s value and that investors should watch Ferrari stock at its IPO price, before it gets out of reach. The company has considerable market and unrivaled appeal. According to estimates, any Ferrari from the 60s, 70s, or 80s gains 16% a year (with one or two exceptions).
The trend changes for modern cars. Not all Ferraris sold today will gain value over the next few years unless it is a special edition like the FXX series or “LaFerrari,” or if it’s raced in a special competition. Current cars are almost all produced in large numbers, even those of the highest quality.
There is the risk that the classic Ferrari market may inflate to become a bubble, which could burst overnight, exactly as in finance. Nevertheless, Ferrari offers a less risky and much cheaper proposition to those interested in investing in the “prancing horse.” Plus, few tickers are as exciting and appropriate as Ferrari’s IPO symbol RACE. Imagine being a broker and RACE stock appears on the screen; it’d be rather tempting to click.
Next week, Ferrari will land on Wall Street with 18.8 million shares to be listed at a share price between $48.00 and $52.00 for a valuation of a billion dollars, meaning the company is worth some $10.0 billion. Ferrari will only float a 10% stake in the company, which will remain solidly under the control of Fiat Chrysler Automobiles, FCA. In Ferrari terms, $10.0 billion is the equivalent of more than 40,000 Ferrari 488 Spiders, each of which costs around $250,000.
Ferrari Valuation Based on Record Revenues and Profits
If the values of classic Ferraris are not tempting enough as an indicator of how Ferrari stock might perform on the NYSE, Ferrari fanatics (Ferraristi, as they’re known) and investors who have little interest in cars alike will appreciate the company’s 10.9% year-over-year revenue growth (based on 2015 third-quarter results of around $750 million).
The red cars prove highly profitable: Ferrari’s adjusted gross operating margin (EBITDA) should be about $215 million, or 19%–22% higher than a year ago, with an operating profit forecast of about $150 million, no less than 60% higher than 2014, which was itself a profitable year.
The Ferrari valuation could end up being 12 or 14 times its 2015 earnings before interest, taxes, depreciation, or amortization (EBITDA), which could be well over $700 million, considering last year it reached 693 million euros (about US$750 million) with 25% sales margins. Profits rose by 8.9% in the first half of the year. (Source: “Ferrari Goes to Race: IPO Brings These ETFs in Focus,” Zacks, October 14, 2015.)
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; that annual limit could rise to 9,000 between now and 2019. (Source: “Ferrari Said to Push for $12.4 Billion Valuation in IPO,” BloombergBusiness, October 8, 2015.)
With 10% of the shares listed on the NYSE, Piero Ferrari, son of Ferrari Automobili founder Enzo Ferrari, will retain his 10% of the company under a holding incorporated in Holland. The remaining 80% of Ferrari shares will be distributed to FCA shareholders, with one Ferrari share for every 10 FCA.
The date of the landing on the NYSE under the symbol RACE has not yet been officially announced but as noted earlier, it is widely rumored to be October 21. On that date, FCA president John Elkann and CEO Sergio Marchionne will ring the bell that will kick off trading. Ferrari will also be listed on the Milan Stock at the beginning of 2016, after the spinoff from FCA.
During the next few days, as Marchionne leads the Ferrari stock roadshow, he is expected to be wooing major General Motors Company (NYSE:GM) shareholders to take further steps toward making a bid for that company. Ferrari’s IPO is the prancing Trojan horse to achieve that acquisition.
To that effect, it is worth noting that the renewal of the collective agreement with American Fiat-Chrysler employees represented by the United Auto Workers (UAW), which was at first rejected but later approved to avert the threat of a strike, supports Marchionne’s ambitions. The Italian-Canadian manager has a close relationship with UAW president Dennis Williams, as shown by their genuine expressions of esteem and a shared vision. Williams is an important ally in FCA’s merger plans; the UAW is GM’s largest shareholder.