The best car manufacturer

Ferrari (RACE) hardly needs any special introduction.

This is a legendary car brand, a style icon in automotive design and is the good idea for investments!?

Recently, the following illustration appeared on the World Wide Web:

So, Ferrari is the most efficient company on the market? Is it so?

We checked the industry analysis and it turns out that there are no companies in the Automotive industry with a rating of 100% or higher in our model.

But Ferrari turned out to be the top of all, surpassing even Tesla!

When analyzing any company, we answer 4 questions:
-Does the company have a competitive advantage?
-Is the company’s management forward-thinking?
-Is management effective?
-How sustainable is the business development?

There is nothing wrong with competitive advantages. But this is not a subjective assessment. This is the analysis of financial statement data.

Gross margin is stable at about 50%, and net profit margin is 20%.

Just for comparison: BMW and Mercedes have 2 times worse performance of such an ratios!

By the way, operating cash flows even exceed accrued profit, which indicates its high quality.

There is another interesting point. Can you find another company where more than 11% of revenue comes from the “Brand” and “Motors” items? No seriously. Mercedes also supplies motors for sports competitions, but we haven’t found anything similar.

Debt burden is typical for all companies in the industry. By it we judge the foresight of management.

For the first time, equity began to exceed the company’s debt. We really like this dynamic and gives us confidence in the company’s plans.

For the last 12 months, the debt to equity ratio is at a normal level of 0.98.

But the cash flow is only enough to cover 60% of the debt, and this suggests that there is room for improvement. Well, or accept this, if not as a weak side of the business, then as its characteristic feature. Therefore, our model’s balance estimate is satisfactory rather than excellent.

The company’s management is super efficient. If you have another explanation for ROE = 47%, let me know. Yeah, we can admit that financial leverage is high and almost equal to 3. This means that assets seriously exceed equity, which is logical with a high level of debt burden. But this is also part of good business management.

As for the stability of development, 2020 has become a challenge for everyone, and even for companies that can be classified as luxury goods producer.

Therefore, it is now difficult to find an issuer with ideal “stability” according to our model.

What do we do to objectively evaluate this side of the business?

We are looking for the ratio of the average growth rate of net profit to the deviation of these rates. Maths allows us to be more objective than just assessing by eye. So, in terms of the last two years, everything is great. If we take a period of 5 years, which includes the period with the pandemic, then the deviation is significantly higher than the growth rate, so the value is below 1, and this is not very good.

Valuation.

When we understand that the company is great and we want to be a co-owner of such a business, all that remains is to find an entry point. And then we will find that Ferrari is trading at a P/E multiple more than 50.

Who in their right mind would buy a car manufacturer with a valuation like that? But wait, let’s look at how the company’s shares have historically been valued over the past 5 years.

And here we will see that the company is always a little bit overvalued and trading at an high prices. Obviously we would like to buy such company at the average valuation (which is marked in the yellow line on our chart). Judging by the chart, there is no need to expect shares of such a tasty issuer to have a minimum P/E.

If this idea is relevant to you, here are our valuation levels (before the new report not yet been published):
-maximal value level = $401.57
-average value level = $276.40
-minimal value level = $146.10

Check out our automotive stock selection to discover more about the industry!