Ferrari 2015 Initial Public Offering 1

Capstone Research Paper: Ferrari 2015 Initial Public Offering

James Whitten

School of Business, California Baptist University

Author Note

James Whitten

I have no known conflict of interest to disclose.

Correspondence concerning this article should be addressed to James Whitten.

Email: jamesa.whitten@calbaptist.edu

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Abstract

This report develops an overall analysis of the 2015 Ferrari IPO. First, it is argued that the

Ferrari strategy revolves around the balance between supply and demand in emerging luxury

markets. A valuation model is then developed around the market multiple of luxury brands.

Finally, a suggested IPO per share value is given for the Ferrari stock based on the valuation

models presented.

Keywords: Financial Management, Ferrari, IPO, Stock Valuation, DCF, Enterprise

Valuation

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Ferrari 2015 Initial Public Offering

Ferrari’s History and Strategy

Ferrari’s historical strategy has established the brand as a highly exclusive product.

Because Enzo Ferrari was such a well-known Italian racer, his cars carried the air of a street legal

race car for those lucky enough to purchase them. Early on the brand struggled with quality

issues, but the focus on exclusivity and quality coupled with the best racing engineering in the

world has led to the brand devotion seen today (Schill & Craddock, 2017).

Ferrari’s updated strategy involves maintaining exclusivity and demand in European

markets while increasing volume to emerging Asian and Middle Eastern markets. This would

mean a roughly 25% increase in volume from 7,255 in 2014 to 9,000 units by 2019. The most

aggressive growth of 7% would happen in 2015 with a modest growth of 5% in 2016, 4% in

2017/2018, and 3% in 2019. This new strategy was developed due to the belief that the demand

was high enough in existing and emerging markets to increase supply without diluting the

market. This belief appears justified, because auto manufactures are projecting an average of

5.2% growth, and luxury brands are forecasting 3.5% growth. This increase in supply and

revenue would be on top of an already steady cash flow from sponsorships and other licensing

agreements for the brand that total roughly 15% of yearly sales (Schill & Craddock, 2017).

The current plan for the IPO relates to the formation of Fiat Chrysler Automobiles

(FCA). Fiat bought Chrysler in 2014, formally creating FCA, and even though this created a

highly diversified brand and product line, Maserati and Ferrari made up 21% of their 2014 EBIT.

This profitability led to the Ferrari 2015 IPO. The plan entails selling 17.175 million shares of

Ferrari with all the capital going to FCA. Then, 80% of the remaining shares held by FCA will

be spun off to FCA stockholders as dividends. The remaining 90% of Ferrari stock will be

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publicly held, with 10% remaining in the Ferrari family. The result is that Ferrari will be publicly

held, and FCA will be able to generate a large amount of capital to improve their existing

products. This will have long-term benefits for Ferrari, as it will be an independent brand again

with an already strong financial outlook, even though Ferrari will be taking on some of FCA’s

debt. For FCA the large payout from Ferrari is an obvious benefit, although it puts pressure on

the company to perform without Ferrari’s added profit margin (Schill & Craddock, 2017).

What is a Christian perspective on this decision? The primary goal of this IPO and

spinoff is to reduce FCA’s debt and improve returns for shareholders. Scripture teaches that, all

things being equal, “the borrower is slave to the lender” (Prov. 22:7). Jesus also taught that the

kingdom of God is reflected in the reality of investing one’s money wisely and ensuring there are

good returns (Matt. 25:14-30). There is no virtue in hoarding money or frivolously spending it.

This financial goal, if wise in the end, is ultimately an attempt to deal well with money. Ferrari,

ideally, will be able to pay off debt better than FCA due to its high margins; therefore, this

appears to be a sound move from a Christian perspective.

Financial Forecasts

An important part of the stability of the Ferrari IPO relates to not only their strategies but

also to the legitimacy of their financial forecasts. If Ferrari increases their supply without an

increased demand, they could dilute their market and fail to hit their targets. In other words, if

the Ferrari product proves to be more elastic than initially assumed, their market could begin to

return less than forecasted with an increase in supply (Schill & Craddock, 2017).

Exhibit 8 shows these forecasts (Schill & Craddock, 2017, p. 19). It is the position of this

report that these are modest and acceptable forecasts. Exhibit 6 of the report shows projected 5-

year growth rates from other auto manufacturers (Schill & Craddock, 2017, p. 17). The lowest of

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these numbers is Toyota with a 3.2% CAGR, and Toyota has a lion’s share of the auto market

already, meaning that the room for growth is smaller. Volkswagen, another industry leader, is

projecting a 3.5% CAGR. An average of CAGR across 14 auto companies shows a 5.8% forecast

(Tesla is excluded due to their high growth rate in the emerging electric market). A similar

analysis of luxury brands shows Prada with a low CAGR of 1.9%, and Hermes International with

a high CAGR of 6.8%. An average across a sample of 6 of these brands shows an average 5-year

CAGR of 3.5%.

These forecasts from both luxury and auto manufacturing brands tell two different

stories. The auto manufacturing industry expects growth greater overall than luxury brands. Is

this reason for concern? Perhaps not. For one, Ferrari is a brand that can spontaneously generate

income through sponsorships, engine sales, custom car sales with huge margins, and licensed

merchandise. Not all luxury brands have this type of diversification. Second, Ferrari is expanding

into a massive Middle Eastern and Asian market where other luxury car brands are already

seeing growth. As noted by Schill & Craddock (2017), the annual growth in China alone for

luxury cars is reported to be above 20% for 5 years. Furthermore, luxury cars in general are

seeing growth up to 9.5% and 11.9%, as reported for BMW and Rolls-Royce. These numbers

along with Ferrari’s public status and the accessibility of new capital and debt instruments makes

their growth expectations very reasonable. With that in mind, however, the terminal growth of

Ferrari can be expected to settle into luxury ranges of about 2% after roughly 5-years of growth

intentional growth (Schill & Craddock, 2017).

From a Christian perspective, the concept of forecasting requires a level of humility.

Overestimating growth can reveal both pride and attempted deception. However, undervaluing

the company hurts and potentially deceives shareholders. The stakes are high when preparing

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any financial report that will impact business decisions, and this is even more true with publicly

released financial forecasts.

Valuation Models

Because Ferrari is a part of both luxury and automotive markets, both need to be initially

evaluated when calculating current market multiples valuation. As seen below, the current

market multiples are 10.29 for the average enterprise value of EBITDA and 2.25 for enterprise

value of revenue. The average of 10.29 is based on an average between a 7.84 multiple in the

automotive industry and a 12.74 multiple in the luxury brands market. This average returns a

multiple that is reasonably higher than other automotive brands on average while being modestly

lower than many luxury brands. The result is a modest valuation that could be low or high

depending on how Ferrari is situated in these respected markets.

Based on EV/EBITDA Based on REV/EBITDA

EBITDA 678.00 Revenue 2762.36
Number of Shares (millions) 189 EV/Revenue (Avg) 2.25
EV (millions) - Avg 6977.17 EV/Revenue Multiple (Avg) 6220.16
EV/EBITDA Multiple (Avg) 10.29 Number of Shares (millions) 189
Price per share (Euros) € 36.92 Price per share (Euros) € 32.91
Price per share (USD) $ 41.99 Price per share (USD) $37.44

As seen in these calculations, the estimated value is € 6,220 - € 6,977. These calculations put the

valuation of the IPO at a minimum of $37.44 per share or a max of $41.99 per share. What if one

were to ignore the automotive multiples? If we treat Ferrari as primarily a luxury brand the

multiples render a different value. This places the value at € 8,637 - € 9,999 with an estimated

$51.99 to $60.18 per share. Because of Ferrari’s luxury model and history of extremely high-

priced collectables, it is more reasonable to go with the luxury valuation model. Otherwise,

Ferrari and FCA risk leaving far too much capital on the table:

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Ferrari Luxury Valuation

Based on EV/EBITDA Based on REV/EBITDA
EBITDA 678.00 Revenue 2762.36
Number of Shares (millions) 189 EV/Revenue 3.62
EV (millions) 8637.72 EV/Revenue Multiple 9999.74
EV/EBITDA Multiple 12.74 Number of Shares (millions) 189
Price per share (Euros) € 45.70 Price per share (Euros) € 52.91
Price per share (USD) $ 51.99 Price per share (USD) $ 60.18

A third valuation model, DCF valuation, gives another point of reference to clarify a

reasonable valuation and per share value. The DCF is based on the forecasts given in exhibit 8

with an average luxury terminal growth rate of 3.53% (an average for luxury brands) after 2019.

FCF (in millions of Euros) 2015 2016 2017 2018 2019

D&A 316.68 338.95 345.28 353.00 368.92
NOPAT 276.90 314.73 351.24 386.71 414.62
Changes in working capital 88.48 54.03 49.04 130.60 128.11
Changes in PP&E 81.47 65.54 18.61 22.73 46.83
FCFF 423.63 534.12 628.87 586.38 608.59
Discounted Cash Flows 392.25 494.55 582.28 542.95 563.51
DCF Valuation
Inputs DCF Calculations
Tax Rate 38% Present Value € 1,566.14
Discount 8% Terminal Value € 9,084.93
€
Risk Free Rate 1.70% Total Value
10,651.07
WACC 5.00% Number of Shares (Millions) 189
Terminal Growth Rate 2% Price per share (Euros) € 48.07
Price per share (USD) $54.68

Based on these models, it is the findings of this report that Ferrari should value its shares

at a minimum of $50.00 per share at opening. This takes into consideration the trends of

automotive companies while also recognizing that Ferrari is a unique brand that exhibits all the

qualities of a luxury product. Certainly, Ferrari could price these shares closer to $60 per share,

but it seems unlikely that this price could be maintained without opening shareholders to more

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risk than necessary. While it is unlikely that a brand like Ferrari could falter completely, the

growth plans of the firm do present a market risk premium that should reduce the price of the

stock into the modest/average luxury industry range.

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References

Brigham, E., & Houston, J. (2019). Fundamentals of Financial Management (15th ed.). Cengage.

Schill, Michael & Craddock, Jenny. (2017) Ferrari: The 2015 Initial Public Offering. Darden

Business Publishing: University of Virginia. https://store.hbr.org/product/ferrari-the-

2015-initial-public-offering/UV7259.

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