Ferrari Q4: The Horse Has Reason to Dance

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Unlike its many contemporaries that operate multiple factories around the world to produce thousands of vehicles, Ferrari N.V., once designated a “small volume manufacturer” (or SVM) by the U.S. Environment Protection Agency (EPA), has operated out of one factory in Italy to produce a little over 10,000 vehicles every year that more-or-less objectively can simply be described as “beautiful”, with the cheapest model retailing for a little under a quarter of a million dollars¹.

As trends go, the cheeky ticker “RACE” is entirely apropos for the Dancing Horse.

Trend Studies

For the most part, Ferraris across prime regions have been largely stable with one notable exception – Mainland China, Hong Kong and Taiwan, wherein sales have gone from 8% of total volume to 11%. In terms of trends, however, there’s a slightly different story:

Source: Company Financials, Leverage Shares analysis

After a slowdown in three regions – United Kingdom, the Americas and China-plus – during the year of the pandemic, practically every region has piled on volume trends year after year. In the present, however, two regions (amounting to a total of 15% of volume) have shown a slowdown over the past year: Switzerland and the “China-plus”. Overall, volumes trends have run so heavily positive since the pandemic that any lags cause by the 2020 slowdown are a tiny blip in the rear view mirror.

In fiscal line items, this trend is essentially redoubled:

Source: Company Financials, Leverage Shares analysis

The 2020 drop in earnings before interest and taxes (EBIT) as a percentage of revenue had already recovered to 2019 levels by 2022 before edging even further in 2023. Net Profits, which had reached a high water mark of 20% in the year following movement restriction (i.e. 2021) and was also beaten in 2023.

In first-order (i.e. year-on-year) terms, both revenue and cost of sales match each other in growth, with the former generally leading the latter since 2020. Since 2020, first-order trends in EBIT vs net profit also match each other, with net profit pulling ahead in 2023.

In diluted earnings per share (EPS), there is no looking back at the bump in the road encountered in 2020, with positive trends ever since. The company started offering dividends 2018. Barring a slowdown in 2021 (likely due to reduced earnings in 2020), there is no looking back here either. In its latest earnings release, the company confirmed that €858 million of a €2 billion multi-year share repurchase program announced in 2022 – and expected to run till 2026 – has been spent. The release also announced that it expects to increase its dividend payout ratio from 30% to 35% of adjusted net profit. To continue towards this goal, the company announced this past Thursday² that a proposal to distribute a dividend of €2.443 has been sent out to shareholders for approval. This proposed dividend is 35% over the one distributed in 2023.

The clientele it attracts is also perhaps key here: despite the 17% year-on-year jump in revenues and a 24% jump in volumes sold in the United States alone, its Total Debt from Financial Services Activities – which exists predominantly to provide retail financing to buyers in the U.S. – rose by 4.8% to $1.29 billion (or approximately 6,109 of the cheapest Ferraris available to buy) by the end of 2023.

Risks and Conclusion

The company has a particularly interesting risk factor included as a risk factor: given that it had to give up its SVM status after producing more than 10,000 vehicles from 2021 onwards, it expects EPA proposals (made in May 2023) requiring stricter emission standards as well as a potential ban of fuel enrichment to bring significant compliance costs to bear if enacted, since it expects other countries to follow suit with requirements that are at least as stringent (if not more). The EPA proposal also removes any potential carve-outs to SVMs, which gives the company little by way of recourse.

This might explain why the company has a little of €2.2 billion in debt from industrial activities, as it builds out more complex solutions for the future. At any rate, given the massive bump in dividends written up by the company’s management since the earnings release and the continued fervour for its products, the company seems to be (at least functionally) unperturbed regarding the future. In fact, Ferrari’s even announced a partnership with BitPay this past week³ wherein customers can buy a Ferrari by paying in DogeCoin (among other cryptocurrencies).

There’s something to be said about confidence. Professional investors can consider RAC3, an Exchange Traded Product (ETP) that gives daily-rebalanced enhanced exposure to the upside of Ferrari’s stock while RA3S does the same on the downside.

Footnotes:

“The Cheapest Ferraris Money Can Buy Today”, TopSpeed, 8 August 2023
“Dividend Distribution Proposal”, Ferrari Investor Relations, 22 February 2024
“Ferrari Enables Dogecoin Integration for Luxury Car Purchase”, DailyCoin, 20 February 2024

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Authored by

Sandeep Rao

27 Feb 2024