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Ferrari (RACE) Q2 Earnings Preview: Can it Drive to New Highs?

Mitchell Moore

Ferrari RACE has a history of strong earnings beats and RACE stock has blown away the competition recently. Investors are now looking for another successful quarterly report from Ferrari that is due out before the market opens Friday, August 2. RACE shares are up 9.4% YTD, but can it keep climbing?

Overview

Ferrari is one of the most respected and storied auto manufacturers in the world, with a history stretching back to its first car built in 1947. In 1969, Fiat bought a 50% stake in the company, later expanding to 90% ownership in 1988. Then, when Fiat and Chrysler merged in 2014 to create FCA FCAU, Ferrari was spun off with an IPO that saw shares transferred to FCA shareholders.

While the company is a relatively small manufacturer, producing just over 9,000 cars last year, compared to Ford’s F 878,000, it vehicles are known for their extremely high-end performance and luxury. Even though 9,000 cars may seem like an small number, Ferrari’s 2018 production volume was up 10.2% over 2017.

No currently-produced Ferrari model has a starting price below $200,000, and some models start as high as $1.4 million. Because of the high prices and exclusivity, Ferrari makes an estimated $80,000 in profit from each car sold.

Ferrari also has a stellar earnings history. In fact, the luxury automaker has posted year-over-year quarterly EPS growth every quarter since 2015, often by 30% or more. Revenues, however, have not increased by as much and have held at around $1 billion per quarter since 2017, logging $1.068 billion last quarter.

Outlook

Ferrari’s brand is extremely established in the world of performance cars, motorsport, and beyond. It has been rated as the world’s most powerful brand, as people everywhere recognize its distinctive horse logo and associate it with performance and luxury.

This is extremely important to Ferrari’s future as it faces more and more competitors. One of the largest threats to the current performance car industry is the rise of high-performance electric cars from companies like Tesla TSLA or Rimac.

These electric performance cars usually have extremely high-performance numbers and can beat most Ferrari’s out on paper in terms of power and other metrics. However, the draw of a Ferrari, as solidified and defined by its brand, is tied to status, emotion, and legacy. This intangible asset should assure investors that the storied manufacturer will be able to weather the storm of electric performance vehicles and last a long time.

Our Zacks Consensus Estimates call for adjusted Q2 EPS of $1.03, for a 3% increase over a year prior. Revenue for this quarter is projected to stay roughly even with just a 0.47% drop to $1.08 billion. This likely means sales are holding steady and production/development costs have fallen slightly. For full-year fiscal 2019, estimates predict revenue will jump 4.95%, while earnings climb 2.74%.

Looking further ahead, estimates for fiscal 2020 appear very promising, with revenue predicted to jump 7.84% above 2019. Earnings are projected to grow by 8.47%. It is hard to tell what is driving this projected growth, as Ferrari makes money from its many brand partnerships and racing endeavors.

One of the side-effects of having such a powerful and recognizable brand is the rampant overvaluation that comes with. Since Ferrari went public in 2015, its forward P/E ratio has steadily crept up to very high levels. It is currently trading at 38x, compared to a much lower auto industry average of 9.39x. However, Ferrari has shown some staying power at this extremely high valuation, meaning it may not end up being a concern for investors.

Bottom Line

Ferrari currently holds a Zacks Rank #3 (Hold), but has seen all four estimate revisions for the current quarter more in a positive direction in the past 60 days. RACE stock has a history of consistent and impressive earnings growth, so investors should look for this to continue in the earnings report.

At the same time, the stock is overvalued relative to the market. But if you are willing to pay the premium, this auto manufacturer will likely continue to stay at the leading edge of high-performance, high-luxury sports cars for years to come.

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