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RACE - Ferrari

Phaceliacapital

By Phaceliacapital
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Guest neiljgsingh

Guest neiljgsingh

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There's been a lot of talk about RACE's pricing power, so I thought I'd share a quick Manual of Ideas video with Josh Tarasoff on this topic: https://www.youtube.com/watch?v=Mv1Cw1RXqjI

 

I'm not sure he'd consider a perpetual 3-5% increase in prices that attractive on a real basis. He'd probably also contest the notion that RACE can raise prices so heavily (remember, this is 3-5% of 250k euros on average) even during sustained downturns.

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jay21 Newbie

jay21

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cmlber -

 

I am a former FCA long. I agree with some of what you say, but I have less confidence in the incremental volumes and the sustainability of price increases and the margin outlook. Unlike you, I don't think 16x EBIT is good value for this. Briefly, besides valuation, some of the reasons to short are: Fashion. Psychology. Positive beta on inequality. Negative beta on commodity prices. Negative beta on EM currencies. Regulatory trends on fuel/engine efficiencies. And of course - high expectations. Sorry for using the word beta so many times.

 

At current prices, I see more downside than upside in the near/medium term. The problem is the (cost) of borrow.

Perfectly happy to reverse my stance and go long at lower prices.

 

Cost of borrow is high? I would think people are stubbing out their legacy FCAU. As float expands, borrow should drop but price might increase as the float becomes big enough for buyers.

 

There should actually be a big shift in holders as value dumps and growth buys.

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cmlber Newbie

cmlber

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cmlber -

 

I am a former FCA long. I agree with some of what you say, but I have less confidence in the incremental volumes and the sustainability of price increases and the margin outlook. Unlike you, I don't think 16x EBIT is good value for this. Briefly, besides valuation, some of the reasons to short are: Fashion. Psychology. Positive beta on inequality. Negative beta on commodity prices. Negative beta on EM currencies. Regulatory trends on fuel/engine efficiencies. And of course - high expectations. Sorry for using the word beta so many times.

 

At current prices, I see more downside than upside in the near/medium term. The problem is the (cost) of borrow.

Perfectly happy to reverse my stance and go long at lower prices.

 

I can understand not wanting to go long at 16x EV/EBIT (although disagree), but it's certainly not a valuation that provides any margin of safety on a short imo...

 

16x EV/EBIT with a 25% tax rate means you're paying 21x unlevered free cash flow.  So you're getting a ~5% free cash flow yield (without using any leverage).  We can debate about what level of price increases is possible and sustainable over time, but without any doubt, they can price with inflation.  So you're getting a 5% real yield, 7% nominal if you get 2% inflation and no growth in units, no fx tailwind.  Not bad in a low interest rate world and probably good enough to meet or exceed the S&P 500 in the long run.

 

And I think 3-5% price increases are definitely possible if units are held constant at 10k (more confident in 3% in the long run, but 5% in the short run is possible for several years).  It doesn't need to be 3-5% increases on a model, it can be a mix shift over time to more expensive, more customized models.  Over time, more and more millionaires that are buying Ferrari's will get pushed by billionaires willing to pay more for something even more exclusive.  Instead of 500 LaFerrari's, why can't they sell 1500?  The demand was there, they just held back for exclusivity.  Or include a LaFerrari + model that sells for $10 million and only sells 50 units. These buyers pay that kind of price for art pieces all the time, at least you can drive a Ferrari.

 

I think unit growth to 10k will be easy to execute.  I view this as a low risk, 5%, inflation protected bond that yields better than anything else you can find and has a lot of optionality that could make it a double over 4-5 years.

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Picasso Newbie

Picasso

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It's also important to keep in mind the last 5-10 years.  China had emerged as a huge luxury product buyer.  People loved all the luxury European products and Ferrari's, Maserati's, etc.  However, Xi JinPing is wagering a huge anti-corruption campaign in China.  Conversation with our contacts in China reveals that wealthy people in China "can't sleep well at night."  Before you brush this off as some minor comment.  Think about the wealth that was created in China in the last decade and who was it concentrated in.  People often compare the anti-corruption campaigns as the second coming of the "cultural revolution."  No one wants to be caught dead with a flashy sports car scandal that involves alcohol, escorts, drugs, and/or embarrassing companions in generals.

 

Thought I would circle back on this comment from BG given how much China sales has deteriorated for Ferrari.  Particularly as people on this board dismiss anecdotal evidence as "not backed by numbers." 

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TwoCitiesCapital Newbie

TwoCitiesCapital

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It's also important to keep in mind the last 5-10 years.  China had emerged as a huge luxury product buyer.  People loved all the luxury European products and Ferrari's, Maserati's, etc.  However, Xi JinPing is wagering a huge anti-corruption campaign in China.  Conversation with our contacts in China reveals that wealthy people in China "can't sleep well at night."  Before you brush this off as some minor comment.  Think about the wealth that was created in China in the last decade and who was it concentrated in.  People often compare the anti-corruption campaigns as the second coming of the "cultural revolution."  No one wants to be caught dead with a flashy sports car scandal that involves alcohol, escorts, drugs, and/or embarrassing companions in generals.

 

Thought I would circle back on this comment from BG given how much China sales has deteriorated for Ferrari.  Particularly as people on this board dismiss anecdotal evidence as "not backed by numbers."

 

My guess is that it has less to do with the anti-corruption charges and more to do with the fact that the Chinese economy is a disaster with cracks really starting to show in recent months.

 

There is something to be said for this - I'd expect Ferrari to be less robust in a new financial crisis centered on China/EM than it was when the last crisis was centered on US/Europe. I know that total sales remained pretty steady in 2008/2009, but does anyone know the breakout of their geographic sales in 2008/2009 vs present? It may show that there was a dependence on EM that helped them in 08/09 but will hurt them in any upcoming crisis coming out of China/commodity-dependent EM.

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Phaceliacapital Newbie

Phaceliacapital

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http://www.bloomberg.com/news/articles/2016-02-17/ferrari-jumps-after-soros-emerges-among-top-10-shareholders

 

At the end of last year, Soros Fund Management LLC owned 850,000 Ferrari shares, equivalent to 0.45 percent of the maker of cars like the $330,000 F12berlinetta, according to a U.S. filing late Tuesday. The holding makes George Soros’s fund one of top investors in Ferrari, which has fallen about 30 percent since its initial public offering in October.

 

+/- 28mn euro, which is not that much for a Soros kind a guy.

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rishig Newbie

rishig

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cmlber -

 

I am a former FCA long. I agree with some of what you say, but I have less confidence in the incremental volumes and the sustainability of price increases and the margin outlook. Unlike you, I don't think 16x EBIT is good value for this. Briefly, besides valuation, some of the reasons to short are: Fashion. Psychology. Positive beta on inequality. Negative beta on commodity prices. Negative beta on EM currencies. Regulatory trends on fuel/engine efficiencies. And of course - high expectations. Sorry for using the word beta so many times.

 

At current prices, I see more downside than upside in the near/medium term. The problem is the (cost) of borrow.

Perfectly happy to reverse my stance and go long at lower prices.

 

I can understand not wanting to go long at 16x EV/EBIT (although disagree), but it's certainly not a valuation that provides any margin of safety on a short imo...

 

16x EV/EBIT with a 25% tax rate means you're paying 21x unlevered free cash flow.  So you're getting a ~5% free cash flow yield (without using any leverage).  We can debate about what level of price increases is possible and sustainable over time, but without any doubt, they can price with inflation.  So you're getting a 5% real yield, 7% nominal if you get 2% inflation and no growth in units, no fx tailwind.  Not bad in a low interest rate world and probably good enough to meet or exceed the S&P 500 in the long run.

 

And I think 3-5% price increases are definitely possible if units are held constant at 10k (more confident in 3% in the long run, but 5% in the short run is possible for several years).  It doesn't need to be 3-5% increases on a model, it can be a mix shift over time to more expensive, more customized models.  Over time, more and more millionaires that are buying Ferrari's will get pushed by billionaires willing to pay more for something even more exclusive.  Instead of 500 LaFerrari's, why can't they sell 1500?  The demand was there, they just held back for exclusivity.  Or include a LaFerrari + model that sells for $10 million and only sells 50 units. These buyers pay that kind of price for art pieces all the time, at least you can drive a Ferrari.

 

I think unit growth to 10k will be easy to execute.  I view this as a low risk, 5%, inflation protected bond that yields better than anything else you can find and has a lot of optionality that could make it a double over 4-5 years.

 

I have looked at a bunch of luxury good companies. True luxury companies, Ferrari being one, can and will raise prices over time. Part of preserving the brand value is to keep it exclusive and rare. Given the Agnelli family owns a majority stake, they are in for the long haul and want to preserve the brand for the long-term. Absent price increases means the product becomes accessible to a larger population of people over time, a killer for a true luxury brand.

 

The China slowdown has caused luxury good sales to slowdown, but if they are managed for the long-term, I think the brand continues to command pricing power for a very long period of time. The economics are better than See's Candies that has raised prices for 30 years and barely grown by volume growth. Now, the question is what to pay for it.

 

I have been looking at Richemont, which owns Cartier. Cartier is an iconic brand that is over 150 years old. It's trading at 10x EV / EBIT because of China concerns. The same pricing power applies to Cartier in my opinion.

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Guest Schwab711

Guest Schwab711

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I have been looking at Richemont, which owns Cartier. Cartier is an iconic brand that is over 150 years old. It's trading at 10x EV / EBIT because of China concerns. The same pricing power applies to Cartier in my opinion.

 

Probably OT but pricing power in general is relevant to RACE. Why don't you know one way or the other were Cartier has pricing power? Couldn't you survey their product prices today and in the past to get an idea? Or ask sales folks or fans of the brand? It would be great to hear how others try to determine the "true" pricing power of a brand (if there is any - in deflation environment, most companies probably don't have any). I'm not prepared to share my work, but for high-quality companies, mid-single-digit pricing power at times representing ~33% of the expected returns. For both RACE and Richemont, I think it might be worth it to try to accurately guesstimate the pricing power since +/- 2% on a 5% pricing power estimate could result in >5% variances in E®.

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bonkers Newbie

bonkers

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I think a CEO change is almost always negative, even if the new guy is Marchionne himself.

 

By the way, I'm slightly worried about him gathering all the strings in his own hands. How many firms/entities is he managing now, as CEO or chairman, 5, 6? Buffett said this weekend that good people have no limits to their capacity, but one should also know when to let go of something. Unless he thinks he's irreplaceable.

 

I also think Ferrari is a fairly easy business to run, as it's not broken (apart from their F1 cars, joke). However, Marchionne's answer to the poor analyst's question as "why is the business performing better now" was "better management. Full stop." And no explanation. I think the analyst calls are a nuisance to him he'd like to dispense with, but I think that's already arrogant.

 

If Marchionne gets a heart attack, Fiat empire will need to find a fresh handful of CEOs overnight.

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whatdadil9 Newbie

whatdadil9

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Any updates here?

 

Looks like from last call:

 

Sergio said 3-5 pct pricing on all models Like for Like. Not including mix either. On pace for 5 pct volume growth. With mix, EBIT could compound 30-50 pct for awhile conceivably off a reasonably low sales growth low double digits. Non auto component not in there either : maserati engines, theme parks, liscencing etc.

 

They have already hit guidance thru 2q. Not sure why its not responding...

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benjamin1978 Newbie

benjamin1978

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Why do you think mix will be favorable for their margins? Thanks

 

Any updates here?

 

Looks like from last call:

 

Sergio said 3-5 pct pricing on all models Like for Like. Not including mix either. On pace for 5 pct volume growth. With mix, EBIT could compound 30-50 pct for awhile conceivably off a reasonably low sales growth low double digits. Non auto component not in there either : maserati engines, theme parks, liscencing etc.

 

They have already hit guidance thru 2q. Not sure why its not responding...

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benjamin1978 Newbie

benjamin1978

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If ASP is 300k...

 

 

And they sell more LTD editions like Le Ferrarina , 2017 commemorative edditions, etc. all of those are at least 2x ASP if not 3... Is that not favorable to mix?

 

But the 488s, California T, FF all have RRP below 300k? And the Lusso is right at 300. Yes there's maybe a couple hundred of Apertas and the 70th anniversary models, but what gives you conviction that on the whole selling more V8s instead of V12 is good for mix?

 

Also, do you know what is the penetration in terms of personalization / customization jobs - in terms of volume?

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