Running head: FERRARI 2015 IPO CASE STUDY 1

Capstone Project – Ferrari 2015 IPO Case Study

Michael A. Leiba

California Baptist University

FERRARI 2015 IPO CASE STUDY 2

Abstract

Founded in 1929 by Enzo Ferrari as an Italian luxury sports car manufacturer, it created much
more than originally intended, it created a luxury brand. The case focuses on the valuation of
Ferrari through different methods as it relates to its 2015 Initial Public Offering (IPO). The
methods that we will be primarily focusing for this case will be the market multiple and the
discounted cash flow valuation
Keywords: DCF, Market-Multiple, Valuation, IPO, Ferrari, Financial Management
FERRARI 2015 IPO CASE STUDY 3

Financial Implications of Ferrari’s Current Strategy

The brand attracts more and more rich people and assumes a constant expansion of these

types of people, but this type of market continues to increase in a straight way. In Ferrari’s 2015

annual report, one detailed the risk that this could potentially cause by stating “While important

to our current marketing strategy, our focus on maintaining low volumes and exclusivity limits

our potential sales growth and profitability.” [ CITATION Fer15 \l 1033 ]

Particularly strong growth was expected among the wealthy in Asia-Pacific, where they

expect wealth to grow by 10.3 percent annually from 2014 to 2017. You should also take the

market assumptions from China that was having a sharp slowdown in luxury sales. But they

make an interesting statement: that their net income, which achieved a CAGR of 7% between

2005 and 2014, "was almost unaffected by the financial crisis." And that's why they don't think a

future crisis would affect them either. But these projections can be supported by the price

increase rather than volume. Reduction of the share of Fiat Chrysler shares by 9% and plans to

dispose of the remaining 81% later. This could significantly affect Ferrari because it is a family

business operating in immature financial markets and the exit of Fiat who as a holding company

had access to better financial information. Additionally, the money raised during the time of the

IPO wasn’t benefiting shareholders like it should have. This is due to the money raised going to

FIAT and then distributed accordingly. On the other hand, this can be mitigated because the value

of Ferrari cars was still increasing, and this would support slightly higher financing.

Before IPO ownership After the OPI property

90% Fiat Chrysler 81% Fiat Chrysler
10% Piero Ferrari 10% Piero Ferrari
9% free float
FERRARI 2015 IPO CASE STUDY 4

Financial Forecast Possible Concerns

Yes, I would support the financial projections because the stocks were not being valued

within the market it was operating (luxury autos), because Ferrari had the world's most

recognizable luxury performance sports cars. According to their analysis of their ratios are

market-based conservatives

Ferrari’s Worth in Euros (Market Multiples & DCF Valuations)

Under the market-multiples valuation, the value was reached by applying the

EV/EBITDA multiple, considering that EBITDA reflects operational cost management better

than other indicators. In addition, the calculated indicator was made on the finances of Hermes

and Prada, companies with a profile similar to that of Ferrari in terms of selling luxury cars.

According to the figures from Exhibition 6 from the case study, the multiples from both, auto and

luxury brands, are generated and displayed in the table below.

Table 1: EBITDA Multiples for Auto Manufacturers

Auto Manufacturers EBITDA multiples

BMW 8.16
Daimler 8.89
Fiat Chrysler 6.33
Ford Motor 17.74
General Motors 12.78
Honda Motor 8.14
Hyundai Motor 10.29
Kia Motors 7.32
Nissan Motor 8.44
Peugeot 10.29
Renault 14.97
Tata Motors 4.90
Tesla Motors 3298.32
Toyota Motor 11.02
Volkswagen 8.33
Average* 9.83
*The calculation of average EBITDA multiple excludes the EBITDA multiple of Tesla Motors, which is highly
irrelevant.
FERRARI 2015 IPO CASE STUDY 5

Table 2: EBITDA Multiples for Luxury Brands

Luxury Brands EBITDA multiples

Burberry Group 10.44
Cie Financiere
Richemont 14.50
Hermes International 23.92
LVMH Moet Hennessy 12.80
Prada 9.74
Tiffany & Co. 12.36
Average 13.96

The calculations and information from the case show that Ferrari would be better

positioned as a luxury brand rather than a car manufacturer for the following reasons. First, from

an investor standpoint and based on the facts from the table above, the average EBITDA

multiplier for luxury brands is 13.96 while the average for the auto manufactures is 9.83; This

being said, the enterprise value comes in higher as a luxury brand which is better for investors

and beneficial for an IPO. Ferrari has always branded themselves as an exclusive luxury brand,

hence the waitlist for cars, invitation only clubs/events, limited inventory, etc. Customers of

Ferrari understand this business model and appreciate the value that it holds outside of being a

car manufacturer. The average EBITDA multiplier 13.96 is used when calculating the EV

(Enterprise Value) of Ferrari and the results are shown below.

Table 3: EBITDA Multiple Valuation

2014 Enterprise
Debt Number of USD/EUR EBITDA Implied Share
EBITDA Value
(EUR) Shares Exchange Rate Multiple Price (USD)
(EUR) (EUR)
687 2,300 189 1.1375 13.96 9585 48.18
Note: 1. Some of the data above are extracted from the description of the case and exhibitions.
2. All values above are in millions.
We can rationally affirm that the average luxury brand ETIBDA multiple, 13.96, is reasonable as

the implied share (48.18) is within price range of $48 - $56. Additionally, that the Enterprise

value recommended through market multiple method is €9585.

FERRARI 2015 IPO CASE STUDY 6

By discounted cash flow valuation using the following formulations:

EBITDA = Total Operating Income + Depreciation & Amortization

EBITDA Margin = EBITDA / Total Revenue
ROC = Total Operating Income * (1 – Tax Rate) / (Net Working Capital + Net PP&E and
Int. Assets)
Free Cash Flow = NOPAT – (Change in PP&E and Int. Assets – Change in Net Working
Capital)
n
Cash Flow
n
Present Value of Free Cash Flows = ∑ (1+ discount rate)n
0

Perpertual Cash Flow

Perpetual Growth Terminal Value =
Discount Rate−Longterm Growth Rate

It considers long-term growth of 3%, and applied WACC was 4.6%, using given equity cost, and

cost of debt. The EBITDA predicted rate was 25% across the board and the margins in the luxury

brands replicate about the same with the exception of Hermes internationals. The EBITDA

margins in the auto manufacturers is far lower than that of Ferrari which further supports the

position of the company being classified as a luxury brand as opposed to simply a manufacturer.

We will be referencing the growth rates from comparable companies in the table below, in our

valuation

Table 4: Projected Growth Rate for Luxury Brands

Luxury Brands Projected Growth Rate

Burberry Group 2.60%
Cie Financiere Richemont 3.10%
Hermes International 6.80%
LVMH Moet Hennessy 2.10%
Prada 1.90%
Tiffany & Co. 4.70%
Average 2.88%
Note: The calculation of Average Projected Growth Rage excludes the Projected
Growth Rate of Hermes International, which is much higher than the industry level
FERRARI 2015 IPO CASE STUDY 7

According to the information from the case, Ferrari’s headquarters and operations were

set in Italy and the corresponding tax rate is 38%, while FCA group’s headquartered in

Netherlands and the corresponding rate is about 25% [ CITATION Net19 \l 1033 ]. With a

discount rate of 5% which we used to calculate the free cash flows; and lastly, we utilized the

growth rate of 2.88% to calculate the present value of the terminal value. All these calculations

were used to allow us to gather the final implied enterprise price. The implied enterprise price we

came up with was 53.85 which let us know that the 2.88% long term growth rate and

recommended enterprise value of 11889 is reasonable because it is within the range mentioned

earlier, $48 - $56; and can be substantiated through the discounted cash-flow method. All

calculations derive from tables 4 and 5 and can be found above or below text.
FERRARI 2015 IPO CASE STUDY 8

Table 5: DCF Valuation

Tax Rate 38.00%

Discount Rate 5.00%
LT Growth Rate 2.88%

Year 2014 2015 2016 2017 2018 2019 2020

EBITDA Margin 24.86% 25.22% 25.72% 25.64% 25.41% 25.15%
14.12
ROC 10.83% 11.32% 12.27% 13.34% 13.88% 14.00% %
Projected Profit /Growth Rate 10.96%
Net operating income after tax-NOPAT 277 315 351 387 415 445
Change in P&PE 81 66 19 23 47 49
Change in NWC 88 54 49 131 128 138
Free Cash Flow 107 195 284 233 240 258

PV of Planning Period 904

PV of Terminal Value 9539 Perp Growth Term Value 12174
Implied Ent Value 10442
Debt 2300 Implied EBITDA multiple 11.73
Implied Equity Value 8142
Shares (Pre-Money) 172
Implied Share Price in EUR 47.34
Implied Share Price in USD 53.85
Implied EBITDA Multiple 13.68

After calculating the two valuations calculated above, we were able to formulate a recommended enterprise value of €10014

based on the average of the two enterprise values of €9585 and €10442 (in millions), respectively.
FERRARI 2015 IPO CASE STUDY 9

Recommended Share Price

While discounted cash flow (DCF) is the most accurate and flexible method for valuing

companies, using a relative valuation approach, such as juxtaposing the earnings multiples of

comparable companies, can provide insights and help you summarize and test your valuation.

[ CITATION McK15 \l 1033 ] The selection of comparable companies is essential in obtaining

an accurate valuation. For instance, our valuation of Ferrari could have been incorrect had we

decided that they were better suited as an auto manufacturer company rather than a luxury brand.

Based on our market multiple valuation, the share price comes to $48.18.

Discounted cash flows (DCF) have been a traditional method in business valuation. This

method is most useful in judging the risk and uncertainty of a project. [ CITATION Uzm10 \l

1033 ]. This valuation method is often used for companies with high cash flows while it relies on

different assumptions and estimations in the calculations would could impact the final figure.

Based on the case facts, there were plenty of uncertainties that could occur that could have an

impact on the direction of the company. Given those reasons, the recommended share price of

53.13, from the discounted cash flow valuation would not be feasible. Thus, the most reasonable

share price that we recommend for Ferrari would have to be set between the given range ($46 -

$56) from the market multiples valuation.

When it comes to decision making, we can (as always) rely on the word to guide us and

give us the knowledge to make the decision that’ll led us in the right direction. However, only

having the knowledge is only half the battle. Proverbs 2:1-5 says

"My son, if you receive my words

and treasure up my commandments with you,
making your ear attentive to wisdom
and inclining your heart to understanding;
yes, if you call out for insight
and raise your voice for understanding,
FERRARI 2015 IPO CASE STUDY 10

if you seek it like silver

and search for it as for hidden treasures,
then you will understand the fear of the LORD
and find the knowledge of God.”

Knowledge is simply knowing/understanding the what the Bible is saying about that

particular decision(s). However, knowing what’s being said isn’t enough, we must have the

wisdom to be able to apply the knowledge that’s being given. If there is ever a situation where

you feel stuck and the decision you need to make isn’t black and white, then that’s okay too

because the Bible emphasizes the fact that we should never shy away from seeking Godly

counsel for those tough times. Proverbs 11:14 "Where there is no guidance, people fall, but in an

abundance of counselors there is safety." Just as in our case study we were asked to make a few

really big decisions that could have had detrimental effects if executed improperly.” We aren’t

meant to go through life without any guidance, it’s near impossible. That’s why it’s very

important to be a part of a church (become a member), share in the fellowship with fellow

likeminded people, and finally... feel confident, ready and willing to be able to ask for another

opinion and really listen to what’s being shared with you.

FERRARI 2015 IPO CASE STUDY 11

References

Ferrari N.V. (2015). Annual Report . Ferrari.

McKinsey, &. C. (2015). Valuation : Measuring and managing the value of companies.

Retrieved from https://ebookcentral.proquest.com

Netherland Goverance. (2019). Corporate Tax.

Uzma, S. H. (2010). Discounted Cash Flow and Its Implication on Intangible Valuation. Global

Business Review(https://doi.org/10.1177/097215091001100304), 11(3), 365–377. .

Proverbs 2:1-5

Proverbs 11:1