Amazon's (AMZN) Grand Tour recently showed its Christmas and 6th episode. In it are such entertaining presentations, including unique takes that only can be done by the three amazing car presenters--Jeremy Clarkson, Richard Hammond and James May.
The Christmas episode featured the entrenched competition between Ferrari (RACE) and Ford's (F) supercars during the 1960's. This article is focused on the former's financials.
(Ferrari P3, Grand Tour Screenshot)
Earnings performance
On Nov. 7, Ferrari reported its third quarter fiscal 2016 results. The supercar company delivered a strong 7.57% net revenue growth to 2.27 billion euros and 22.7% profit growth to 288.8 million euros in its recent nine months of operations.
Ferrari's shares rose 7.48% that day in comparison to a 2.22% increase in the broader S&P 500 index.
As observed, Ferrari experienced growth in expenses, but a pronounced growth in profit deductions brought by the company's "net financial expenses/income" from 5.4 million euros to 25 million euros, a 362% increase for the period.
(Ferrari)
Net financial expenses/income and the FCA Note
Ferrari defined these expenses in relation to its foreign currency exchange losses and interest on debt incurred as a result of its restructuring--as what can be known of the FCA and FNE Notes.
According to MarketWatch, Ferrari--prior to its IPO--was 90% owned by Fiat Chrysler Automobile (FCAU) and 10% owned by Piero Ferrari, the company founder's son.
Ferrari then issued Fiat Chrysler Automobile (FCA) Notes amounting to a principal amount of 7.9 billion euros, of which 5.8 billion would be repaid brought by proceeds raised from the IPO, having a remaining 2.8 billion euro in the FCA Note arrangement. The outstanding balance was due to mature in April, according to Bloomberg.
In the process, Ferrari was able to settle the FCA Note through bank borrowings, bond offerings, securitization and other debt.
Fiat Chrysler then sold its 10% stake during the IPO event, leaving the carmaker with 80% ownership--which would then be transferred to its shareholders and certain convertible debt holders--and Piero Ferrari with 10%.
So far, Ferrari's shares had performed well post-IPO having capital returns of 35.3%.
(Ferrari)
Valuations
According to GuruFocus data, the $14 billion Ferrari had a trailing PE ratio of 29.9 times (industry median 17), PB ratio of 55.7 times (industry median 1.58) and PS ratio of 3.3 times (industry median 0.76). Ferrari, despite its leveraged position, had a trailing dividend yield of 0.88% with a 33% payout ratio.
(20-F)
Ferrari
Ferrari was founded in 1947 by Enzo Ferrari. Over time, the supercar company devoted its time in developing exquisite, powerful endurance cars that could last in World Championship races, such as the 24 Hours of La Mans, 24 Hours of Daytona and Formula One tournaments. Ferrari sold 50% of its stake to another Italian car maker Fiat Chrysler in 1969 and allowed the latter to raise its stake to 90% in the late 1980's.
Ferrari is among the world's leading luxury brands focused on the design, engineering, production and sale of the world's most recognizable luxury performance sports cars. Ferrari designs, engineers and produces its cars in Maranello, Italy, and sells them in over 60 markets worldwide with 198 points of sale, 47% of which are located in EMEA--U.K., Germany, Switzerland, Italy, France, Middle East, Africa and other European countries.
In 2015, Ferrari shipped 44%, or 3,351, of its manufactured cars to EMEA, and 34.4% were delivered to the Americas.
Ferrari currently sells seven car models, including four sports cars (488 GTB, 488 Spider, F12berlinetta and its special series F12 Tour de France, or F12tdf) and three GT cars (California T, FF and its new GTC4Lusso).
(F12tdf, 20-F)
Ferrari only makes a limited number of these exquisite cars. For example, only 799 F12tdf would be manufactured since it was unveiled to the public in October 2015. In addition to the limited cars, Ferrari also sells watches and other accessories.
(20-F)
According to Ferrari, its sales of luxurious cars have been less volatile compared to the industry as a whole. As of 2015, Ferrari had 24% market share in the global luxury car market industry.
Ferrari also allocates a good amount of its sales in research and development for its Formula 1 racing activities. About 30% of Ferrari's net sales on average were put to research in the past three fiscal years. This is for Ferrari to support the development of its sports and GT car models and prototypes in current and long-term basis.
Overall, Ferrari had three-year sales, profit and operating margin averages of 8.65%, 8.49% and 15.5%.
(Results presentation)
Cash, debt and book value
As of Sept. 30, Ferrari had 482.4 million euros in cash and 2.20 billion euros in total debt with a debt-equity ratio of 9.4 times, compared to negative 116.5 in December 2015. Ferrari also had 26.8% of its 4.2 billion euro assets in goodwill and intangibles, while having a book value of 233.7 million euros, compared to negative 19.4 million euros in December 2015.
(488 GTB, 20-F)
Cash flow
(10-Q)
Ferrari grew its cash flow for operations by 6.2% to 567.2 million euros for its recent nine-month operations. Ferrari's profit growth helped increase its cash flow. Further, Ferrari demonstrated increases in inventories, trade payables and other operating assets and liabilities.
In particular, the 77 million euros increase in operating assets can primarily be attributed to cash advances received by Ferrari in relation to the LaFerrari Aperta, which was just unveiled on Sept. 29.
(LaFerrari Aperta, Ferrari)
Capital expenditures were 110.7 million euros, then leaving Ferrari with 456.5 million euros in free cash flow, compared to 415 million euros a year ago. As observed, Ferrari also invests a good amount of money in intangible assets. Cash flow allocated to the latter was 124.9 million euros, compared to 115.2 million euros in the prior year.
Ferrari, upon shareholder approval at its annual general meeting on April 15, provided dividends amounting to 86.9 million euros. Ferrari also had been paying dividends to a non-controlling interest, Ferrari International Cars Trading (Shanghai) Company (FICTS).
Ferrari indirectly owns 80% of FICTS. Secondary to restructuring and certain arrangements, Ferrari handed out dividends to its non-controlling interest amounting to 16.4 million euros in its recent nine-month operations, compared to 41 million euros in the prior year. Meanwhile, company filings earlier indicated that the remaining balance of payouts to FICTS would be paid this fiscal year.
As per its free cash flow percentage payouts, Ferrari handed out 22.6%, or 103.3 million euros, of its free cash flow as dividends to both common and non-controlling entities during the recent three quarters, compared to having provided 9.8% the previous year.
In addition, Ferrari was also able to fully repay its 500 million euros 'Bridge Loan' for the period, and also reduced its 'Term Loan' by 300 million euros. According to filings, Ferrari had drawn down 1.425 billion of Term Loans secondary to its restructuring period. That would indicate a probable 1.1 billion to 1.2 billion of Term Loans repayments left.
Also, Ferrari took in about 744.8 million euros in securitizations, bond proceeds and other debt.
Conclusion
Due to Ferrari's jaw-dropping book value multiple and highly leveraged-state of its balance sheet as a result of its independent stance moving forward, the supercar company should be able to consistently earn and grow its business overtime to catch up. Eliminating or not providing any dividend payouts in the first place would have also been seen as sensible.
Certainly, Ferrari's current valuation would deter any conservative investor, but looking into its financials revealed that the company is focused on reducing its liabilities as business continues to grow. So far, the company was able to deliver strong figures to answer to its obligations brought by its pristine brand name and extensive car history.
In October, analysts at UBS rated Ferrari as a buy and estimated a price of $60 a share. Meanwhile, Societe Generale labeled the company's share as a sell and had a $45 price for it.
There is no question that loyalty to Ferrari's luxurious brand and exquisite car models would not fade anytime soon, absent any existential threat brought by electronic vehicles. To be on the safe side, Ferrari should continuously demonstrate its ability to reduce debt--while not risking any share dilution, which may also be not applicable since 10% is owned by the Ferrari heir. In summary, Ferrari is a pass.
Notes
(1) 20-F: The restructuring comprised: (i) a capital reorganization of the group under Ferrari and (ii) the issuance of promissory note to Fiat Chrysler Automobile (the "FCA Note") which was subsequently refinanced through the issuance of third party debt (the FCA Note and subsequent refinancing.
6-F: as part of Ferrari's restructuring, the supercar manufacturer also acquired Ferrari North Europe Limited by issuing an FNE Note amounting to 2.8 million pounds back in October 2015.
(2) Information here moving forward would be from Ferrari's 20-F, 6-F and presentations, unless indicated.
(3) 20-F: We (Ferrari) pursue a low volume production strategy in order to maintain a reputation of exclusivity and scarcity among purchasers of our (Ferrari) cars and deliberately monitor and maintain our (Ferrari) production volumes and delivery wait-times to promote this reputation.
(4) Morningstar data.
(5) 20-F: Intangible assets are mostly related to Ferrari's externally acquired and internally generated development costs and information technologies costs. This enhances the company's focus in developing its current and future new (car) models.
Disclosure: I do not have shares in any of the companies mentioned.
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