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Thursday, 05/07/2020 10:10:16 PM

Thursday, May 07, 2020 10:10:16 PM

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Ferrari - >>> One Car Maker That Will Emerge Stronger From the Pandemic. It’s Not Who You Might Think.


By Al Root

May 7, 2020

There is one automotive company that will emerge unscathed from the coronavirus crisis—and actually come out stronger than before the outbreak. It sounds impossible, but that’s what Morgan Stanley analyst Adam Jonas believes about one of the companies he covers.

There have been some bright spots among car makers lately. General Motors stock (ticker: GM) jumped after the company reported better-than-expected first-quarter earnings Wednesday. Tesla (TSLA) has strung together a few impressive quarters, sending shares up more than 200% over the past year. But it’s neither of those.

The company in question is Ferrari (RACE). And Jonas has five reasons backing up his argument.

The Balance Sheet

Ferrari will generate positive free cash flow in 2020. Jonas models about $150 million in free cash flow, while Wall Street consensus calls for about $200 million. Mainstream auto maker Ford Motor (F), on the other hand, will burn through about $2 to $3 billion this year, according to analysts.

New Models

Ferrari is launching four models in 2020, including the SF90 Stradale, the 812 GTS, F8 Spider and the Roma grand touring model. The Roma has a V-8 engine, generating more than 600 horsepower, and the car starts at $220,000. Two more models are coming in 2021, according to Jonas. New products should help simulate new demand, regardless of the economic environment.

Formula One Racing

This benefit isn’t obvious. But some new rules for the highest level of auto racing have been pushed out until 2022, keeping costs down. That’s saving Ferrari money over the near term. The company doesn’t break out its Formula One spending in its annual report.

The Brand

“The pedigree of the Ferrari brand is more relevant than ever now,” wrote Jonas in a Wednesday research report. He sees more licensing opportunities in the future. What’s more, the company can bring a new generation of Ferrari enthusiasts into the fold by focusing on esports.

Achievable Financial Guidance

Ferrari reported quarterly numbers on May 4. It did something unique regarding guidance: It actually gave some. Most companies have withdrawn full-year 2020 guidance because Covid-19 has made the outlook too murky.

Looking ahead, the company expects to generate about $1.1 billion in Ebitda, short for earnings before interest, taxes, depreciation, and amortization. Management’s initial guidance was about $1.4 billion.

Ferrari actually missed earnings estimates when it reported on May 4, but the stock jumped 7% anyway. Weak earnings in the first and second quarter of the year aren’t a surprise. Italy, after all, is one of the countries hit hardest by the Covid-19 outbreak.

Cases in Italy topped 210,000 and deaths surpassed 29,000. The government locked down much of Northern Italy in early March, including Modena. Ferrari’s primary manufacturing location is in Maranello, Italy, just south of Modena.

Ferrari production was halted for seven weeks, and company management addressed a May restart on their quarterly conference call, stressing caution. “We now have the capacity to perform 800 voluntary blood tests a day to cover both our employees and their families,” said CEO Louis Camilleri.

In addition to all the points Jonas makes, it probably helps that Ferrari only sells about 10,000, incredibly valuable sports cars each year. Ferrari is a luxury goods company as much as it is a car maker.

So it makes sense that Ferrari trades like a luxury stock. Shares fetch about 35 times estimated 2021 earnings. GM stock, for instance, trades for 5 times estimated next year’s earnings. LVMH Moët Hennessy Louis Vuitton (MC.France), a luxury stock, trades for 23 times estimated 2021 earnings. That’s lower than Ferrari, but LVMH is buying jewelry giant Tiffany (TIF) for about 30 times 2021 earnings.

Investors, it seems, remains confident the richest consumers will keep spending.

Jonas, for his part, rates Ferrari shares the equivalent of Buy. His price target for the stock is $180, about 15% higher than recent levels.

Ferrari shares are down about 5% year to date, performing a little better than comparable drops of the Dow Jones Industrial Average and the S&P 500.