Ferarri Readies for IPO

Rebel Money

She said she never drove foreign
So I introduced her to my red Ferrari- Waka Flocka

Next Tuesday, the IPO for Ferrari is expected to debut on the market. The iconic car has been owned by Fiat Chrysler Automobiles NV, who own 90% and Piero Ferrari, the second son of the company’s founder who owns 10%. Fiat Chrysler as the controlling shareholder is selling a 10% stake to the open market and distributing the remaining 80% to it’s shareholders in an IPO price that values the luxury car company at close to $10billion. The ticker symbol for the new stock will be $RACE, and it will be trading on the NYSE.

It’s an incredible transformation for one of the most successful super-car makers in the world, from the tiny racing start up by Enzo Ferrari to what it is now. Unlike Tesla who are banking on economies of scale to deliver mass vehicles, with 55,000 cars considered a tiny drop for what the company expects to sell in the future, Ferrari lays the stakes out as to its position as a niche brand, capping its sales at around just 7,000 to 7,400 cars annually across just eight models to make sure that demand always outstrips supply. It’s pure luxury psychology: less, as they say at Gucci, is more. The company has a months long waiting list for its cars, and even having loads of money does not guarantee you’ll get one. As a rule, Ferrari gives preference to existing owners, leading to approximately 60% of its sales coming from people who already own Ferraris. The company won’t even let you go crazy with customization requests so that you don’t ruin the value of their brand with your appalling personal taste. All of that control have made their brand the #1 in the world’s ranking of valuable brands.

That said, is their IPO a buy? Let’s see.

Last year, the Ferrari unit had a revenue of $3.1 billion (up 16% from 2013) and Net profits of $302 million (almost flat from 2013). Their earnings before Interest, tax and some non-cash expenses (EBITDA) came up to $790 million, which suggests but does not conclusively confirm an operating cash flow of around $650 million. Given that the company has grown sales at around 7% a year in the past decade, and showed extraordinary pricing power by only suffering a single year of 5% sales decline during the worst of the recession (that kind of pricing power is increasingly rare in the competitive world of today’s business), the valuation at 15x cashflow, 12.7x EBITDA and a little over 3x revenue is more than appropriately priced, especially for a luxury brand. And being that the company could realistically raise sales to up to 10,000 vehicles a year, I won’t be surprised to see valuations rise to $15 billion in the course of trading and more than that over time.

Therefore, I’d rank it a buy.

Now, how to go about actually buying? Since you and I aren’t institutional investors and don’t get to buy into the IPO before it hits the market, there is a very real possibility of the average retail investor not being able to get their hands on Ferrari stock until it may have been boosted to values that are unsustainable.

Thankfully, Fiat Chrysler who will retain 80% of Ferrari post IPO are publicly traded. They have already climbed 37% year to date, but given the chances of a successful Ferrari, their remaining brands including Maserati, Jeep and Alfa Romeo and all else, there’s no reason one can’t buy their stock today and ride the IPO through them kind of like Yahoo’s stock was a backdoor entry to Alibaba’s IPO.

It’s what I’m doing, and I guess from next Tuesday and the subsequent weeks, we’ll know if that strategy yields results.

If you’re interested in learning more about the Ferrari IPO, you can read their prospectus here.

IPO

Ferrari Stock Ticker: $RACE

Price:  $58-$62

Fiat Chrysler Stock Ticker: $FCAU

Price: $15.92

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