Ferrari: A RACE for profits
What’s Behind Millennials Favorite Brands?
In our series “What’s Behind Millennials Favorite Brands?” we try to analyze our generation’s most beloved brands. In my last article “Starbucks: A Growth Story”, I analyzed how one of the most famous American coffee companies attempted to augment their sales by expanding their product portfolio and their business in general. This week we are going to see what’s behind a brand that is not only millennial, but a timeless company that captures the imagination of people of all ages: Ferrari. This Italian automaker is a synonym of performance, quality, and is the materialization of that special feeling only fast cars can give us. Unlike Starbucks, Ferrari does not seek to sell as much as they can, in fact, until recently their annual production of cars was capped at 7,000 units to maintain the brands scarcity perception that makes the products so valuable. In 2014 that cap was lifted by CEO Sergio Marchionne right before the company’s IPO (when a company offers their shares in a public stock exchange for the first time) and last year’s production was limited to a little bit over 8,000 cars and will reach a maximum of 10,000 by 2021. So, this opens the question of how to grow a company’s profits if you can’t grow the company´s core product sales and, as always, we have the answer.
In spite of being one of the most renowned names in the auto industry, Ferrari’s car production is relatively low- having sold only 8,016 cars in 2016. Just as a comparison, German car manufacturer Porsche sold 238,000 units during the same period. Further, the Italian company’s sales increased only by 350 cars from 2015 (that’s just 4.5%), but net profits increased by an amazing 39% (from €288 million to €399 million). And is not like Ferrari couldn’t sell more cars, it’s that they don’t want to. This low volume strategy means that the company can charge an average €273,000 for each car, but still that doesn’t justify the strong increase in profits. So, what does?
First, you need to remember that Ferrari is not only a car manufacturing firm, but also a branding company, a formula 1 team, and less well-known, an engine supplier. Now we’re seeing where all of those juicy profits come from. Taking that into account, let’s begin by looking at how the company uses its brand to increase its profits.
The prancing horse logo is recognizable everywhere in the world. Through 70 years of producing the world’s best performance cars and having the most successful Formula One team in history (this is important to notice considering that 400 million people watch Formula One every year), Ferrari has managed to cultivate the best brand image in the motoring world and build a very solid fanbase all around the world. People that do not necessarily have the economic resources to afford one of the cars still want to be a part of the experience the brand offers. As a result, the company has been able to significantly monetize this aspirational feeling by licensing its logo and brand to other companies that in turn are able to charge a premium for having Ferrari’s logo on their products. Licenses represented 16% of the firm’s revenues in 2016 (€488 million) and were up 11% from 2015. Some of you may be thinking that it doesn´t sound like much, but you must remember that Ferrari does not have to spent a cent in the production of these goods, the investment comes 100% from the licensees (in other words, this is mostly profits) and they do a lot of stuff from toys and clothing to theme parks. Actually, 12% of all the licensing royalties come from the Abu Dhabi Ferrari World where they also have the world’s fastest roller coaster (and it sort of makes sense). This year they also opened another theme park in partnership with Port Aventura in Spain with an investment of €100 million (and remember they don’t pay a cent!). By the end 2025 Ferrari plans to open two more theme parks, one in the Americas and one in Asia. Here is a table of Ferrari’s current licensing mix:
Another significant revenue stream that has also proved profitable in recent years, though normally overlooked, is the company’s engine manufacturing division that supplies engines for Formula One teams and Maserati cars. As a matter of fact, Ferrari produces more engines for Maserati than for their own cars with an approximate output of 54,000 engines in 2016. This meant a total revenue of €338 million last year alone. This division is Ferrari’s fastest growing arm with a 55% rise in sales compared to 2015. This is directly correlated to Maserati’s sales, which have increased significantly due to the release of their new Levante SUV , resulting in an increase in the manufacturer’s sales by over 30%.
This increase in profits has prompted an important increase in the stock price. In the last year the company’s stock price has risen a whopping 58.6% and currently stands at $70.54 (04/18/2017) which in our opinion is a fair value that represents all the future benefits the company can expect in the foreseeable future. This implies a price to earnings ratio of 31.43 trailing twelve months which is higher than most luxury companies and way higher than most car manufacturers.
If you liked our article, please like and share, help us get millennials to make wise investments and get interested in the stock market. See you next week!
Disclaimer: This article is based purely in our own knowledge, experience, and research. It should not be taken as an expert’s advice for stock picking.
