Ferrari Still Looks too Racy

Carmaker more than twice the forward valuation of BMW and Daimler
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As an example of scarcity driving value, the limited edition V12 hybrid LaFerrari is tough to beat. Some 499 vehicles were built by the Italian sportscar maker at a sticker price of more than $1 million. A barely used model went on sale this summer for $5 million. 

Power Slide

Ferrari shares have tumbled since the carmaker's IPO

Sergio Marchionne, Fiat Chrysler's voluble chief executive, has tried to pull off the same trick with Ferrari itself, arguing that its unique status meant it should be set apart from the common rabble of carmakers when it sold 10 percent of shares in an initial public offering last month. 

A consummate salesman and financial engineer, Marchionne pitched Ferrari to investors as a luxury goods company that deserves an earnings multiple similar to Hermes, Prada or LVMH. As usual, the man who brought Fiat back from the brink of bankruptcy got what he wanted. Ferrari's shares have declined 12 per cent since the IPO, taking some of the gleam off that shiny red paintwork. But it still trades at more than double the forward valuation of premium automakers Daimler and BMW.

Fiat Chrysler is holding an extraordinary general meeting this week to approve the demerger of Ferrari, ahead of a spin-off of the remaining shares. This is good for the parent company, which can fund new investments and pay down debt with the proceeds. But what about new Ferrari shareholders? To justify such a lofty valuation in the long-term Ferrari earnings will need to accelerate rapidly, which seems unlikely. If not, that luxury premium will be hard to defend.

Luxury Peers

Ferrari's price-earnings ratio is higher than its fellow carmakers

Ferrari plans to increase vehicle sales from a projected 7,700 units this year to about 9,000 by 2019, which will help. But increasing volumes much further is difficult when it is rarity that lets you keep prices and margins high. Last year, the adjusted Ebitda margin was 25 percent, well ahead of competitors.

Unlike Porsche, Lamborghini and Bentley, Ferrari has also resisted developing a cash-cow sports-utility vehicle. "Our low-volume strategy may limit potential profits," said Ferrari in its IPO prospectus. Quite.

Marchionne would have you believe this doesn't matter because Ferrari is more than a car company. Yet there's scant evidence so far that Ferrari is capable of turning its prancing-horse logo into a luxury goods label to rival Louis-Vuitton. The large multiples attached to fashion brands in part reflect their earnings potential in China, which accounted for only 9 per cent of Ferrari vehicle shipments last year.  

Ferrari generated more than 80 per cent of revenues last year by selling cars, spare parts and engines.  In contrast, Formula One sponsorship receipts and Ferrari brand merchandise and licensing sales contributed less than 15 per cent.

Many people grow up lusting after a Ferrari, but fewer dream of owning a Ferrari watch, jacket or polo shirt. Changing that will take time and it's unclear how plans for more crowd-pleasing Ferrari theme parks will burnish exclusivity.

Ferrari's development costs also have far more in common with a carmaker than a handbag-maker. Last year R&D accounted for almost 20 per cent of sales and Ferrari will struggle to reduce that if it wants to restore its pedigree in Formula One, where it has not won a constructor's championship since 2008.

By cutting ties with its parent, Ferrari is thumbing its nose at the industry norm for low-volume brands to share costs as part of a larger stable. Volkswagen has 12 brands, including the aforementioned Porsche, Lamborghini and Bentley. And the car business is by nature capital intensive. Just ask Marchionne, who gave a presentation in April entitled "Confessions of a Capital Junkie" in which he urged consolidation and accused the car industry of failing to earn its cost of capital.

A high-end performance car is frequently an emotional, rather than rational, purchase. Yet Marchionne's luxury sales pitch stretches the singular appeal of Ferrari a little too far.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Chris Bryant in Frankfurt at

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