Question

What do you think Ferrari is worth in Euros? Justify your recommendation based on current market multiples valuation and a DCF valuation.

Answer 1

Over the last five years, super luxury car manufacturers have seen sales grow faster than the rest of the auto industry, with much of the additional growth coming from newly minted rich people in emerging markets, in general, and China, in particular.

Region	# Cars sold
Africa	100
Asia	1319
Australia & New Zealand	200
Central and South America	562
Eastern Europe & Russia	504
Middle East	521
North America	1900
Western Europe	2149
Ferrari	7255

Valuation Narratives/ Valuations

If valuation is driven by stories, here are a two that you can use to value Ferrari:

1. Status Quo: Ferrari remains a extra-exclusive automobile company, keeping production low and prices super-high. The benefits of this strategy are high operating margins (Ferrari has among the highest in the auto business) partly because of the high prices and partly because the company does not have to spend on expensive ad campaigns or selling. It also will keep reinvestment needs to a minimum, since capacity expansion will be limited. In addition, by focusing on a very small group of super rich people around the world, Ferrari may be less affected by macroeconomic forces than other luxury auto companies; I give it a cost of capital of 6.96% (in Euros).
   • Inputs: Revenue growth rate of 4% a year for next 5 years, Operating margin stays at 18.20%, Cost of capital of 6.96%, Return on capital in perpetuity locked in at 14.56% (much higher than the cost of capital of 7% in stable growth.)
   • Valuation yields a value for equity of 6,310 million Euros (approximarly $7,000 million)
2. Rev it up: Ferrari tries to broaden its customer base, perhaps by introducing a lower-cost version; this would mirror what Maserati did with its $100,000 Ghibli model. That will allow for higher revenue growth but like Maserati, Ferrari will have to yield some of its operating margin, since this strategy will require lower prices and higher selling costs. Seeking a larger market will also expose it to more market risk, pushing its cost of capital in high growth to 8.5% and its cost of capital beyond to 7.5%.
   • Inputs: Revenue growth rate of 10% a year for next 5 years, Operating margin drops to 15%, Cost of capital of 8.5%, Return on capital in perpetuity locked in at 12% higher than the cost of capital of 7.5% in stable growth.)
   • Valuation yields a value for equity of 5,741 million Euros (approximarly $6,500 million)

At least based on my estimates, it is more sensible for Ferrari to stick with its low-growth, high price strategy and keep itself above the fray of the auto business, a bad business where most companies seem to have a tough time earning their cost of capital.

Where is the brand name premium?

There is a lot of casual talk about how Ferrari will command a premium because of its name and some have suggested that you should add that premium on to estimated value. In an intrinsic valuation, it is double counting to add a premium and the reason is simple. The values that I have estimated already incorporate the premium. If you are wondering how, take a look at the operating margin of 18.20% that I have used for Ferrari, a number vastly in excess of the margins earned by other auto companies. That high margin, in conjunction with limited growth in cars sold, also allows Ferrari to earn a return on capital of 14.56%, well above its cost of capital. These inputs yield a value premium, with the magnitude varying across multiples:

	Ferrari	Auto Sector	Reason for difference
EV/Sales	2.10	0.90	Ferrari's operating margin is 18.2% versus Industry average of 6.58%.
EV/EBITDA	12.57	8.54	Ferrari EBITDA/Invested capital is 15.68% versus Industry average of 14.45%.
PE	22.87	11.79	Ferrari has a debt ratio of 9.43% versus Industry average of 39.06%.