By Agnieszka Flak
MILAN (Reuters) - Ferrari is being launched as a luxury stock for its Wall Street debut but may struggle to justify such a valuation in the long run given its profit margins and the investment needed to put its prancing horse logo on other products.
Fiat Chrysler Automobiles (FCA) (FCHA.MI) is offering a 10 percent stake in Ferrari at $48-$52 a share, a price that would give the maker of famous sports cars such as the Testarossa a market capitalization of up to $9.8 billion.
Including net debt of 2 billion euros inherited as part of its separation from parent FCA, Ferrari's enterprise value could rise to 10.6 billion euros ($12.1 billion) - a valuation that helped push FCA shares as much as 2 percent higher on Monday.
Analysts say the small number of shares on sale, Ferrari's strong brand and the exclusivity of a company that for years has capped car sales at about 7,000 a year will support the initial public offering (IPO).
The valuation will also satisfy Ferrari Chairman Sergio Marchionne who has said the company is worth at least 10 billion euros and that it should be viewed as a "true luxury" stock.
But once the IPO hype fades, analysts worry that for all its Formula One racing pedigree and exclusivity, exemplified by the LaFerrari supercar's 1 million euro price tag, Ferrari may have its work cut out to justify a value on a par with luxury goods makers such as Prada (1913.HK) and Hermes (HRMS.PA), which trade at multiples more than double the average for carmakers.
At the middle of the IPO range, Ferrari's enterprise value would be 3.8 times estimated 2015 sales and 14 times EBITDA (earnings before interest, tax, depreciation and amortization), according to Arndt Ellinghorst, an analyst at Evercore ISI.
That compares with enterprise value over EBITDA for the coming year of 18.3 times for Hermes and 3.5 times for BMW (BMWG.DE), according to Thomson Reuters data.
"Whilst we agree Ferrari has the potential to grow sales from about 7,000 units to about 10,000 relatively easily in the next few years, longer-term we question whether it really has better unit growth potential than a company like BMW," said Ellinghorst. "Investors should seriously question whether (Ferrari) should trade on 4 times the multiple of BMW."
Ferrari's profits have nearly trebled over the past decade and its 14 percent operating margin - operating profit as a percentage of sales - is unmatched by any carmaker bar high-end sports car rival Porsche (VOWG_p.DE).
But those margins are also still well below Prada's 26 percent and have been pressured by rising costs.
Ferrari's revenue growth has been slower than most European luxury goods companies and the money it invests to develop new models and engines is more than double, depressing its return on capital.
"This is a low-growth, low-free cash flow, modest return business with massive technology costs and complex regulatory challenges," Max Warburton, an analyst at Bernstein, said in a recent note to clients.
A self-imposed cap on sales makes for a healthy customer waiting list of more than a year but keeps average annual sales growth far below other carmakers.
Ferrari said it would seek to increase shipments to 9,000 cars in 2019 from 7,255 last year. It also plans to expand into sportswear, watches, accessories and electronics and to open a second theme park next year.
But without the backing of a parent, Ferrari's need to meet emissions targets may be costly and could hurt its growth ambitions. Expansion may also be hampered by the slowdown in Asia, already hitting sales of engines to sister-brand Maserati.
FCA owns 90 percent of Ferrari, with the remainder held by Piero Ferrari, vice chairman and son of the founder Enzo. FCA will use proceeds from the stock sale for its own ambitious turnaround plan.
It aims to spin off Ferrari next year and hand out the rest of its stake to its own shareholders, which would increase the free float in shares to more than 60 percent.
($1 = 0.8785 euros)
(Editing by David Clarke)