🏎️🏁Business Overview

🎯Key Metrics

Total: 8/17

• +2 ✅✅ Projected Operating Margin: 31.57%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 6.38%
• +1 ✅ Last 5-Year ROIC: 18.20%
• +1 ✅ Estimated Cost of Capital: 9.33% (less than ROIC)
• +1 ✅ Last 5-Year Shares Outstanding CAGR: -0.78%
• -1 ❌ Projected 5-Year EPS CAGR: 7.29% (given that the companies can “manipulate” in a sense this values, below 10% it represents a negative)
• +1 ✅ Projected 5-Year Dividend CAGR: 15.01%
• +1 ✅ Estimated Debt Rating: A1
• +2 ✅✅ Morningstar Moat: Wide
• +0 ⚠️ Morningstar Uncertainty: Medium

Ferrari is a solid company, racing with a wide moat with its worldwide known brand that results in a very high operating margin. The fact that its ROIC is almost double its cost of capital (WACC) gives us good reasons to believe in its investment decisions.

The modest CAGR values for both revenue and eps growth can represent a little bit of concern. However, please note that this can also be justified by the decision of the company to reamin as a “status” symbol. Not everyone can own a Ferrari and this will ultimately limit how much the company grows but will make its margins higher.

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/E – we assume mean reversion to the historical PE values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;
• Historical P/CF – we assume mean reversion to the historical P/CF values;
• Historical P/S – we assume mean reversion to the historical P/S values.

I’ll give more weight to the DCF and EPS methods, and only then the historical ones. Giving the changing landscape of the world in general, is very difficult to believe that in 100% of the cases mean reversion to historical values is guaranteed.

Cost of Capital

I’ve used both the latest and annual financial statements of the company, the 10-Year Germany bonds as the risk free rate (for companies residing in Euro countries is what I normally use) and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Please also note, that given the fact that Moody’s don’t provide a rating for the company we’ll be estimating it using its operating income.

Cost of Capital: 9.33%.

This value will be used later as a discount rate in the valuation methods.

Discounted Cash Flows (Weight: 30%)

I’ve used the latest and annual financial statements of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

This gives us a estimated fair value of 135.77 euros for Ferrari.

We can also do some Monte Carlo simulations to execute multiple DCF valuations. Each simulation will randomize the inputs between some pre-defined values. For this I also used analysts estimates.

As you can see from the above Ferrari seems to be overvalued, using DCF, because even on the higher end of the simulations its DCF estimated fair value is still very low compared to the company’s price.

EPS Growth (Weight: 20%)

For this simple valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 35 PE for Ferrari given its history and “status” brand.

Then again, I used the Monte Carlo simulations to check how the estimated fair value changed as my assumptions were modified.

Using this valuation method, Ferrari that is currently priced at 325.7 euros, seems to be very overvalued being currently valued above the P90 that is 291.48 euros. What this means is that given that it’s above P90, exists 90%+ of chance for the real value of Ferrari to be below what its currently trading at.

This seems to be in line with what we’ve currently seen with the DCF valuation, despite values being different. Let’s continue.

Historical P/E (Weight: 15%)

The current P/E ratio is a little below its 7-8 Year average, this could mean the stock is undervalued. Using its historical average and comparing it to today’s price we reach a fair value of 379.86 euros.

Historical EV/EBITDA (Weight: 15%)

Its current EV/EBITDA seems to be a little bit higher than its average over the last 7 Years. This could mean the stock is currently overvalued. Comparing it to the today’s price we reach a fair value of 274.08 euros.

Historical P/CF (Weight: 10%)

The current P/CF value is lower than its historical average. This could mean the stock is undervalued and we reach a fair value of 384.09 euros, given its historical values and assuming mean reversion.

Historical P/S (Weight: 10%)

The current P/S ratio is a little below it historical average and this means that the company is undervalued or at least fair valued given this comparison. We reach the fair value of 342.12 euros.

💰 Fair Value Estimate

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I’ll take a fair value of 243.56 euros for Ferrari given my confidence that its wide moat and premium brand deserves a High Confidence value.

Please remember that the fair value estimate is just a number and, probably, a very wrong number. However, overall, Ferrari seems to be overvalued at the moment.

Fair Value: 243.56 euros