Luxury Car Maker Ferrari Is A Long-Time Leader, But Hits These 2 Speed Bumps

Ferrari stock has outshined fellow automakers and luxury players alike since its 2015 debut. But Trump tariff threats and slowing earnings growth have tapped the brakes on the Italian sports car company’s shares.

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Trump Tariff Threats

Along with declines for the major stock market indexes, Ferrari (RACE) is feeling the weight of recent tweets from President Donald Trump, who is threatening a 20% tariff on cars imported from the EU. The latest threat comes after retaliatory tariffs from the EU in response to Trump’s implementation of duties on steel and aluminum.

Whether or not the Trump tariff threats become a reality, the threat of automakers getting swept up into the trade war drama in a massive way is a risk that some investors may not be willing to take on. But Ferrari’s pricing power could mute the potential impact.

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And as the Trump tariff threats loom, so does the company’s capital markets day in September, where Ferrari has plans to update its five-year road map. The company in January announced its first SUV is due out in late 2019 or 2020. Ferrari also said it will push into the Chinese market.

Ferrari is also working on a luxury electric car that could woo high-end consumers away from premium offerings from Tesla (TSLA). Several luxury and sports carmakers are rolling out would-be Tesla killers in the next few years.

“While acknowledging the potential for exciting new product unveils and reiteration of ambitious medium term targets to drive the stock toward our bull case, we remain UW (underweight) as we look ahead of an epoch of higher spending, elevated execution risk, and fierce competition,” said Morgan Stanley analyst Adam Jonas in a May 22 report.

Ferrari Exclusivity Vs. Growth

A notable concern for a brand like Ferrari, which has a long history of success in Formula One racing, is how to strike the right balance between growth and preserving exclusivity.

Ferrari management’s existing strategic plan is to increase sports car shipments from 7,694 units in 2015 to 9,000 in 2019.

“We have a great deal of confidence in management’s ability to execute on this plan given plentiful evidence that demand currently far outstrips supply,” said JPMorgan analyst Ryan Brinkman in a May 7 research report.

Brinkman noted yearlong waits for customers to take deliveries and the recent announcement of a complete sellout for the F12tdf, of which only 799 were made.

“There is likely a level of deliveries beyond which expansion would harm exclusivity (and therefore pricing and profits). We do not know precisely where this limit lies, of course, but we believe it is well in excess of the 10,000 per annum amount,” Brinkman said.

But Jonas says the expansion into new markets like China and new segments like SUVs presents “a challenge to the brand’s exclusivity and residual value retention.”

Ferrari Stock

Ferrari stock broke out of a flat base with a 141.66 buy point on June 13. After becoming slightly extended from the 5% chase zone, shares began pulling back amid broader stock market selling and the Trump tariff threats.

By the end of June, Ferrari had undercut its 50-day moving average and fell as much as 7% below its buy point, triggering a sell signal. Since then however, Ferrari stock has found support at its still-rising 50-day line.

Ferrari stock has an IBD Composite Rating of 96 out of 99. That means it outperforms 96% of stocks on metrics like earnings and sales growth, margins, ROE and price performance. That’s far better than any other automaker.

Ferrari Earnings Growth Slows

Revenue likely fell 4% in the June quarter. That would mark the first top-line decline since Ferrari’s public spinoff from Fiat Chrysler (FCAU) in October 2015.

Analysts expect earnings growth to decelerate. They see 11% EPS growth in the June quarter after Ferrari earnings raced 37% higher in the March quarter. That would be the smallest profit gain in 10 quarters. Ferrari costs have risen due to product portfolio revisions and the launch of new models.

While analysts at Banca IMI called the current year “more challenging” for Ferrari, optimism remains.

“We believe that Ferrari’s unique characteristics place the company in a good position to achieve its midterm targets and to deliver an EBITDA margin at the high end of the range (33-38) of luxury players,” analysts with Banca IMI said in a June 4 research report.

Other Supercar IPOs In The Works?

Ferrari’s successful IPO could spur public offerings from other high-end automakers.

“A read-across on the planned IPO of Aston Martin may also heighten investors’ appetite for Ferrari,” Banca IMI said. The analysts said that could inspire a “re-rating” of Ferrari’s valuation given there would be a competitor to compare financials.

Conversely, Morgan Stanley’s Jonas isn’t convinced that these IPOs would necessarily be a good thing for Ferrari.

Jonas argues that “a potential supply of new ultra-premium car companies to the public equity markets (Aston Martin, McLaren, Lamborghini, etc.) offers greater supply of stock for investors to choose from, potentially diluting Ferrari’s exclusive position in the market.”

But with the Trump tariff threats, those IPOs may be on hold, at least until market conditions improve.

On the positive side, Jonas notes that Ferrari and other luxury brands “have shown resilience during periods of economic uncertainty.” He added that the luxury car company is “probably the least cyclical company in our coverage universe.”

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