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‘Luxury brand’ Ferrari deserves IPO premium

Pras Subramanian
Sebastian Vettel driving the Ferrari SF15-T
Sebastian Vettel driving the Ferrari SF15-T

From the quiet hills of Maranello to the bright lights and fast money of Wall Street, Ferrari has come a long way in its 86-year history. As the company prepares its NYSE debut, investors are expecting a molto bene first day of trading.

The company has a unique history, a raison d'être, that many people probably don’t know of, or understand. Started as strictly a racing team by the iconic Enzo Ferrari, the team was building and racing its own cars back in 1947, and has competed in every season of the Formula 1 World Championship.

The legendary Enzo Ferrari, Italian GP, Monza 1961
The legendary Enzo Ferrari, Italian GP, Monza 1961

The company has become a part of the heart and soul of Italy, as the team’s passionate fans - the Tifosi as they are called - will attest. Enzo Ferrari only started selling some of his prize race cars to civilians as a means to raise money for the racing team. The popularity of those cars has led to the racing and automotive legend that Ferrari is today, and that legend has grown since the death of Enzo Ferrari in 1988.

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Enter Sergio Marchionne, current CEO and chairman of Fiat Chrysler Automobiles (FCAU), which owns Ferrari. Marchionne understands the importance of Ferrari, the “sacred brand” of Italy. He understands the racing heritage of the company, once claiming a Ferrari that doesn’t win on the track, is, in fact, not a Ferrari.

He also understands how to make money. As Ferrari prepares its updated IPO filing which will be released imminently, Bloomberg reports word on the street is the initial public offering could see the company’s valuation hit as high $12.4 billion. Marchionne said previously he expects the valuation for Ferrari to top $10 billion.

The $1.3 million Ferrari LaFerrari
The $1.3 million Ferrari LaFerrari

“[It’s] certainly a unique asset, it's a unique brand - it definitely qualifies as one of the world class luxury brands out there, and it's profitable,” says Yahoo Finance’s Mike Santoli about Ferrari and growing investor appetite for the company’s IPO. “I mean it certainly looks like a rich valuation if it gets what people are talking about - over $12 billion - but not an outlandish one, and [it] actually has decent, relatively reliable cash flow margins.”

Santoli notes that Ferrari doesn’t have a cyclical business like most automakers since it builds a limited number of cars every year that are snapped up by passionate buyers - regardless of economic climate. While Santoli believes Ferrari isn’t a great investment at these rumored multiples, there are similar comparables in the market. “Porsche (PAH3.DE) has been public a long time, and it's obviously a much higher volume producer but it's similar - handmade, carefully engineered cars,” he notes.

Sergio Marchionne
Sergio Marchionne

Marchionne has been making the case that Ferrari deserves a higher valuation than typical automakers, because the company is like a luxury goods maker. Think Prada, or Hermes, Marchionne argues. Those companies trade in the teens and some over 20 times profit, as opposed to automakers who are in the single digits.

Santoli agrees Ferrari deserves to trade at a higher multiple, or premium, given that argument, but for investors he warns it may make sense to tap on the brakes a little. “I think the real question for an investor is how big should that premium be, and how durable is that premium going to be, over time.”

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