Daily Management Review

A Unique Chance to Buy Ferrari for Less than 60 Dollars


One of the most anticipated IPO in recent years has entered the final stage. Ferrari’s shares trading is beginning in less than 10 days. So far, the company has been estimated at less than $ 10 billion, what is well below expectations.

The shares of the luxury and status vehicles’ manufacturer will be placed in the range of $ 48-52 per share. This implies an assessment of $ 9.8 billion when placed at the upper end.

Recall that Fiat Chrysler Automobiles (FCA), which owns 94.4% stake in Ferrari, plans to sell a package of approximately 9% (17,175,000 ordinary shares) during the IPO.

The placing will be held at the New York Stock Exchange (NYSE), where Fiat may receive up to $ 893 million.

Ferrari’s IPO organizers are the UBS Group AG, Bank of America Merrill Lynch, Banco Santander SA, Mediobanca SpA and JPMorgan Chase & Co. They can also get an option to purchase an additional 1% of shares in the automaker.

Start for the shares trading, which will have the ticker RACE, is scheduled for October 21.

It is interesting that Ferrari itself will get no money from the placement. IPO is necessary to start Ferrari’s spin-off from Fiat Chrysler. At the beginning of 2016, the rest of the company's shares may be distributed to FCA’s shareholders.

Earlier, analysts and market participants talked about the company’s value at the level of 10-11 billion euros, or $ 11,4-12,5 billion.

Chief Executive Officer of Fiat Chrysler Sergio Marchionne, who is also chair of Ferrari’s board of directors, previously insisted that the company must be assessed based on multiples, characteristic for luxury goods manufacturers, not just automakers.

Estimates of luxury-brands exceed the operating profit in more than 20 times, which is twice more than for automakers.

As a result, Ferrari should have been estimated in EBITDA’s range 12-14h in the worst case (earnings before interest, taxes, depreciation and amortization). Such a high estimate would be quite justified, given the capital intensity of the profit per unit of output, the operating lever and price rigidities.

Ferrari’s adjusted EBITDA last year amounted to 693 million euros in the profitability of 25%. Profit grew by 8.9% in the first half of 2015.

Yet, apparently, the jumped risks and market volatility due to the Volkswagen scandal led to a marked reduction in the assessment. According to conservative estimates, Ferrari is undervalued by more than 20% in this price range.

Let us also not forget about the prospects of the company. Previously, the company made a fairly unusual step in order to maintain exclusivity and prestige vehicles – it has limited sales.

This allowed the company to hardly react to market conditions, as the demand for such vehicles was stable. Ferrari can change the value of cars, depending on changes in the cost of components, while maintaining a constant margin, which significantly increases stability. In fact, the cars are bought before they leave the factory. Problems begin only in the period of global financial turmoil, but even then, there is still demand for the "status" cars.

Now, Ferrari is planning to increase production volumes, although they remain modest, allowing the company to stay "premium and prestige." In particular, Ferrari 488 Spider’s production will have been increased by 9 thousand before 2019.

source: fortune.com

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