Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Say what you like about Fiat Chrysler's outspoken CEO Sergio Marchionne, he's not workshy.

On top of his main job and working for Exor, the Agnelli family investment vehicle, Marchionne has added the title of Ferrari CEO to his business card (he's already chairman there).

An astute financial engineer, he has a knack for making the most of limited assets. But Ferrari, spun out of Fiat Chrysler at the start of the year, is a very different challenge.

Considering its small size, Ferrari already makes lots of money and the company raised full-year sales and profit guidance on Monday. Nevertheless, it needs to find another gear to justify its fuel-injected valuation. Following an IPO in October -- and even after a recent dip -- Ferrari shares trade on about 23 times this year's estimated earnings, more than double the level of BMW's.

The reason for that premium is well explored: Marchionne pitched Ferrari to investors as a luxury goods company, the horsepower equivalent of Prada or Hermes.

Cars and the Catwalk
Ferrari is valued like a luxury goods company, not a car company
Source: Bloomberg

Marchionne's no fashionista -- he goes for simple pullovers rather than Italian tailoring. But investors bought into the story anyway, at least at the time of the IPO. Since then, they've started doubting him, sending the stock down 14 percent post-flotation.

Seeing Red
Ferrari's shares have fallen since the IPO amid doubts about the company's luxury strategy
Source: Bloomberg

It's easy to understand the worries. Ferrari's 18 percent first-quarter Ebit margin looks pretty thrilling when compared to the 10 percent return on sales at Daimler's car unit last year. But to put those inflated luxury comparisons in context, Hermes has a 32 percent margin.

Making autos is far more capital intensive and less cash generative than making handbags. Once investments are deducted, Ferrari generated a modest 45 million euros ($52 million) of free cash flow in the quarter.

Emissions regulations, digitalization and intensifying competition all mean that capex and R&D is bound to remain high. That's why it's crucial that Ferrari shows it can make money from non-car luxury goods, to back up Marchionne's investment thesis.

So far Ferrari's efforts in that department have been underwhelming. Fancy paying 325 pounds ($479) for this Ferrari wristwatch or 75 pounds for this polo shirt? Me neither. While revenue from quarterly sponsorship, commercial and brand revenues (which includes Formula One and merchandise) rose 8 percent, much of that came from the motor-racing team.

Marchionne promises new products, though they won't arrive until next year. It's hard to imagine Ferrari becoming a fashion sensation overnight. It's also expanding in branded theme parks but those don't exactly scream exclusivity either.

Making Marchionne's task harder is Ferrari's disappointing showing in F1 racing. Success on the track underpins the brand image but the prancing horse hasn't won a constructor's championship since 2008. Despite hiring a good driver -- Sebastian Vettel -- it's yet to win a race this season.

Marchionne is disappointed by that performance. Unless he can steer a path to backing up Ferrari's extravagant IPO valuation, he'll have similar disenchantment directed his way.

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

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net