10-Minute Investment Autopsy No. 2: Ferrari
Precision is overrated. This case shows why.
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here. You will get the most out of each case if you:
Pause after the “Original Thesis” section and think about what you would have done
Engage with the discussion questions and other members in the weekly thread designed to help you further improve your investing process
The Original Thesis
Who: Adam Wyden of ADW Capital
When: March 2017
What: Ferrari (ticker: RACE)
The Thesis:
Ferrari is a better business than people think
Low capital intensity and plenty of excess capacity
Meaningful unserved demand due to the growth in high-net-worth individuals having outgrown Ferrari’s production growth by a large margin over the last three decades
Wall Street expectations of 21% EBIT margins in 2018 are way too low given the high incremental margins of 65%+
Believes 2018 will see production of 9,000 units and 3.5% unit price increase for an annual EBIT of EUR 1.4B and a margin of 35%
Believes a multiple closer to a luxury goods company such as Hermes is more appropriate. With Hermes trading at EV/EBIT of 22x, Adam believes that Ferrari should be worth at least 16.5x.
Additional upside possible from ancillary revenues such as licensing over the next several years
This is Ferrari’s long-term stock price chart up until the moment when Adam presented his thesis:
These are the highlights of Ferrari’s then-recent financials up to the point when Adam was presenting his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
Ferrari’s financials following Adam’s presentation were as follows:
2018 car shipments surpassed 9,000
EBIT was €825M, far below €1.4B that Adam forecast
Margins of 24% were above Wall Street estimates at the time Adam articulated his thesis but below his 35% forecast
Over a ~ 3 year period Ferrari’s stock meaningfully outperformed the market
The meaningful outperformance in Ferrari’s stock endured to this day
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread