The business of making Ferraris is doing embarrassingly well in the pandemic.
COVID-19 has affected the production and delivery of luxury cars, but not demand from the wealthy to acquire them, as analysts have noted. The financial impact of the virus on Ferrari NV’s performance is, for now, looking like only one quarter of lost earnings. Management has handled the crisis well.
Revenue fell 42% year-on-year in the second quarter, with vehicle shipments dropping 48%, Monday’s results revealed. Production slipped after factories were closed to protect workforces, and the shuttering of dealers hampered deliveries. The company decided against taking the axe to capital expenditures and costs, choosing instead to continue paying staff and to accelerate bonuses for dealers. Hence earnings per share fell 95%, while free cash flow was negative.
Meanwhile, the order book for new cars is “as strong as ever.” The group says its customers’ morale is high. The pandemic supports private car use at all budgets, and Ferrari believes many see a purchase of one of its vehicles as a reward during a time of difficulty.
This has given Ferrari the confidence to be more precise in its guidance for the year. Underlying Ebitda, a measure of profit, is expected to be down just 13%, at around 1.1 billion euros ($1.3 billion). Second-half Ebitda is expected to be up year-on-year, with the performance weighted toward the end of 2020.
There’s a debate about whether Ferrari’s peers are the mainstream carmakers or the luxury houses. Its strong pricing power, and skill in controlling volumes and squeezing demand to maintain cache, reinforce the argument it belongs with the latter. The second-quarter fall in sales was in line with that of Hermes International, and only slightly less severe than the drops announced by Kering SA and Richemont in their latest quarterly updates. Louis Vuitton Moet Hennessy SE fared somewhat better, with a revenue drop of 38% in the second quarter.
Hence Ferrari’s luxury valuation. The company’s shares are 5% higher than when they started the year, whereas European stocks are down over 10%. On an enterprise value basis, the stock is worth 20 times next year’s estimated Ebitda. Hermes’ multiple is 25, while the rest trail on 13 at best.
Although Ferrari is demonstrating its resilience to the pandemic, it would be wrong to think the crisis brings no threats to its business. Some challenges may have yet to emerge. As governments look for ways to pay for the costs of the coronavirus, expect a raft of policies seeking to tax those who can afford a Ferrari as a pick-me-up in miserable times.
(Bloomberg)
