Ferrari Stock: What To Expect From Purosangue Sales (NYSE:RACE)

Ferrari Fastest Model In Company History

Michael Dodge/Getty Images News

Introduction

We finally saw it: The long-expected Ferrari SUV Purosangue was unveiled to the public a few weeks ago. Many have been the comments from Ferrari fans, some of which were afraid of Ferrari trying to embark on the SUV segment. Now, although opinions may vary about this new model, we can be sure that Ferrari has succeeded in creating a lot of expectation and buzz around it. Although I have covered the stock a few times already, I would like to give an update in order to assess what the introduction of this model may mean for the Maranello-based company and, as a consequence, for people who, like me, are invested in it.

Summary of previous coverage

I began my experience as a Seeking Alpha contributor with an article on Ferrari (NYSE:RACE), where I gave some in-depth analysis of the company presenting my bull case for a recession-proof stock. To readers who are interested in a thorough analysis, the research presented there’s still valid and it’s still the foundation of my investment in the stock.

I then pointed out after Ferrari’s 2022 Investor Day that the stock is presenting more and more the right characteristics for a dividend growth portfolio.

Finally, after reading the 1H results, I shared my thoughts on some key aspects about Ferrari’s wide moat that goes along with a healthy balance sheet and high profitability.

Ferrari Purosangue: A look at the car

Race stock, Ferrari stock, Ferrari Purosangue, Ferrari valuation

Ferrari Website

Above we can take a look at the unveiled car which, unlike forecasts, is not exactly an SUV but rather a four-door four-seater luxury sports car. It’s important to say that it’s the Prancing Horse’s first ever model like this. The name Purosangue is important as it’s the Italian word for “thoroughbred,” as if the company wants to reassure that this is a real Ferrari, while among its fans there lingers some concern about Ferrari betraying its iconic history.

Ferrari also was careful to equip the Purosangue with a key engine, the Maranello naturally-aspirated V12 which can unleash a massive 725 cv.

As Ferrari explains, the car, though it was thought to be an SUV, is actually a one-of-kind model that can’t be compared to modern GT archetypes:

To enable the company to achieve the ambitious goals set for this project and create a car worthy of a place in its range, a completely different layout and innovative proportions compared to modern GT archetypes (so-called crossovers and SUVs) were adopted. The average modern GT’s engine is mounted forwards in the car, almost straddling the front axle with the gearbox coupled directly to it; this results in less than optimal weight distribution that delivers driving dynamics and driving pleasure well short of the standards of excellence to which Prancing Horse clients and enthusiasts have become accustomed.

The Purosangue, on the other hand, has a mid-front-mounted engine with the gearbox at the rear to create a sporty transaxle layout. The Power Transfer Unit (PTU) is coupled in front of the engine to provide a unique 4×4 transmission. This delivers exactly the 49:51% weight distribution that Maranello’s engineers deem optimal for a mid-front-engined sports car.

The impact on sales

Enzo Ferrari used to say that Ferrari will always deliver one car less than the market demand. Purosangue deliveries will begin January 2023. Some of the concerns about this model is that it may encounter such a demand that Ferrari will ease up its exclusivity policy in order to chase orders. Some of these fears are fostered as we see the great results the Lamborghini Urus is achieving. In fact, Lamborghini sold 8,315 cars in 2021, out of which, 5,240 were Urus, the SUV launched in 2018. It means that this model accounts for 63% of Lamborghini’s sales. From Lamborghini’s data, we know that the demand for this product is great.

This is why Ferrari clearly stated at its last Capital Markets Day that the Purosangue’s yearly average contribution to shipments will remain below 20% over its lifecycle.

Now, in 2021 Ferrari shipped 11,155 vehicles. At the end of the first six months of 2022, Ferrari reported 6,706 delivered vehicles. This means that Ferrari can end 2022 above 13,000 units sold. We know that Ferrari plans on growing around 9% per year. This doesn’t necessarily translate into a 9% growth in the number of sold vehicles because this growth may be achieved not only by volume but also by product mix. In any case, let’s assume Ferrari will be selling around 13,000 vehicles in 2023.

We have to calculate Ferrari’s revenue per vehicle sold. In 1H 22 Ferrari sold 6,706 vehicles for a total revenue of €2.48 billion. This translates into a revenue per vehicle of €369,000. True, we could use the revenue reported only from the cars division (Ferrari also reports revenues from engines and sponsorships) which was €2.11 billion. This would give us a €315,000 revenue per vehicle. I think, in any case, that it’s reasonable to divide the whole revenue by the number of vehicles sold because without these vehicles there would be no engine sales nor sponsorships. In a certain way, every vehicle contributes to total revenues. But, let’s focus on the real revenue per vehicle without anything else and let’s stick to €315,000 as the average price.

Now, we know that the Purosangue starting price is €390,000. We also know that no Ferrari customer buys a machine without some customization. So we can expect Ferrari to sell every Purosangue at least around €400,000 and I do think this is a very conservative estimate.

Ferrari won’t allow this car to breach 20% of total volumes so next year Ferrari won’t be able to sell more than 2,600 Purosangues.

Let’s make room for the Purosangue as it takes the place of dismissed models. We have 2,600 vehicles sold at an average price of €315,000 that will be replaced by 2,600 vehicles sold at an average price of €400,000. The net revenue added is €221 million. Furthermore, top tier vehicles like the Purosangue usually have higher EBIT margins, which currently is at 23% with a 2026 guidance of 27%-30%. Now, the impact of the €221 million translates directly into a 4.5% increase of the 2022 expected revenue of €4.9 billion. In other words, just the Purosangue does half of the job Ferrari needs to grow at a 9% yearly rate, not counting its positive impact on margins. If the Purosangue average price will be €410,000 then it will have a 5% revenue growth. If the price will be €420,000, the Purosangue will increase the total revenues by 5.6%. Given the fact that there will be a strict control on volumes and Ferrari will sell more or less half of the Urus Lamborghini sells, we can expect prices to be high as Ferrari will leverage once again its exclusivity.

Conclusion

Ferrari is one of the most predictable businesses in the world because it has a business model that controls on purpose volumes in order to support the exclusivity of the brand. This is why it has been seen by more than one as a recession proof business. I already shared different ways to give a valuation of the company. Currently, I stick to my last discounted cash flow model in which I’m expecting over the next five years to see Ferrari’s FCF to grow at around 10% a year and then keep on growing at just more than 4%. It might seem generous, but Ferrari has the strength to keep up with these numbers. I reach a price target of $260 which is a 23% upside from today’s price of $211. This is why I rate the stock as a buy and why I watch it closely ready to take advantage of major dips.

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