Chit Chat Stocks - Ferrari (Ticker: RACE) Not So Deep Dive

Episode Date: December 19, 2023

Ferrari N.V. (RACE) is a renowned luxury sports car manufacturer, balancing exclusivity with evolving consumer preferences and environmental concerns in the competitive automotive market. Listen as Brett and Ryan break down the company and its industry. Enjoy the show! ****************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠⁠⁠⁠⁠⁠ibkr.com/info⁠⁠⁠⁠⁠⁠⁠⁠ ***************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: ⁠⁠⁠⁠⁠⁠⁠⁠https://chitchatmoney.substack.com/⁠⁠⁠⁠⁠⁠⁠⁠ Want updates on future shows and projects? Follow us on Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠https://twitter.com/chitchatmoney⁠⁠⁠⁠⁠⁠⁠⁠ Contact us: ⁠⁠⁠⁠⁠⁠⁠⁠[e-mail]⁠⁠⁠⁠⁠⁠⁠⁠ Timestamps Company Background | (3:12) Luxury | (24:35) Ownership | (35:26) Earnings | (36:48) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. welcome into chit chat money my name is brett schaefer and i'm joined by my co-host ryan henderson as always today is our tuesday not so deep dive episode where we analyze one stock by covering its business model ownership financials and future growth opportunities we are continuing our luxury theme month we have had two interviews related to luxury

One is a luxury overview. That was an extended discussion with Sleepwell Capital and Leandro from Best Anchor Stocks. That'll be right in your feed. The other day, we have one on RH, formerly Restoration Hardware, that will be out by the time this has come out with Paul Cerro. And then today, we're discussing Ferrari as a specific stock to analyze as a not-so-deep dive. Next week, we're doing Hermes.

And last week, we covered the conglomerate LVMH. So I think by the time we get done with this, if you want to know about the luxury industry, you listen to those five interviews, or excuse me, these five episodes, you'll be sick of us talking for so long. But I think you'll have a better grasp, at least, on the sector. I think maybe that's it. Ryan, let's just say, for general,

there will be show notes in the sub stack link in the show notes that's the email newsletter that's free and if you like the show give us a five-star review on either their apple podcast or spotify you know what we gotta start doing we gotta start doing this the founders podcast used to do this and i think it's brilliant if you like us if you enjoy our research please tell a friend about us it's the best way that's a good way it's the best way to grow the show uh but we're talking Ferrari today and probably one of the most recognizable brands in the world, top 100, I'd say, at least. And it's one that gets a lot of, I think it gets miscategorized a lot. I think people hear Ferrari, they think cars. They really are, in trying to describe the business,

it's hard to really call it a car company because it just does not bear any resemblance financially to a car company. It doesn't have a lot of the same headwinds. It doesn't even really compete with a lot of automotive producers. So they really are a luxury brand and they are almost a club in a way. When I started researching this business, and this is one that I've followed for quite a long time actually the more you look at ferrari unfortunately i think you've have you owned it or or or not i have not you have not and we never owned it in the fund uh that is maybe like mostly my fault yeah that's mostly my fault that uh we didn't but i guess maybe we can get to that stuff later where the stock uh spoiler alert has done extremely well since getting spun

out and we'll learn more. Ryan, I'll go into more of the spin out later. Yeah. And Ferrari, when you look at it, it's almost more like a billionaire's club than a real business. And so the reason I say that is Ferrari is unique. They only deliver about 10,000 cars a year, a little over. And for reference, for context, Tesla delivers 2 million cars a year. Toyota probably delivers, I don't know, 10 million. There is no other publicly listed stock or publicly listed car manufacturer that I know of that has this market cap to deliveries ratio. So it's very unique in that way. And they really do try to limit supply. So Enzo Ferrari once said, Ferrari will always deliver one car less than the market demand.

And I would venture to bet that it's significantly more than one car less. But the idea there is that they're going to undersupply because they want the allure around Ferrari, the imagination of owning one to be so compelling that people are willing to pay exorbitant prices. And that's exactly what happens. So the cars they do sell are very expensive. Depending on the model, the average selling price can range from anywhere between $250,000 on the low end to $3 million or even more for sometimes if they have a really, really rich client who wants a custom job that's kind of a one-off, they can really juice the cost on those. But in terms of the actual kind of model, the business model, Ferrari does all of its production in Italy, primarily through its Maranello plant. And they sell through their network of just under 200 dealerships located all around the

globe. Little context around the Maranello plant. Ferrari had a manufacturing facility in Italy in the 40s when Enzo first built the kind of Ferrari company. It wasn't called the Ferrari Company at the time because you had this licensing dispute with Alfa Romeo. But it was during World War II. There was concerns about bombing. The Ferrari Company at the time had basically become a government manufacturer, I think, for the engines and a bunch of other stuff that's needed during the war. So they moved Ferrari's manufacturing facility up

up to Maranello, which is in Northern Italy. And it's stayed there ever since, kind of a random fact, but just thought it was kind of interesting. And so anyways, production's done in Maranello for the most part. They have a network of 200 dealerships located around the globe. However, these aren't dealerships in the traditional sense. I think people hear dealerships and they probably picture a lot full of them, a bunch of cars, maybe a couple cars being shown in a showroom that people can look at and you can walk up there and they'll try to sell you on it and you can walk away with the car that day. There's no walking away with a Ferrari that day if you walk up to a dealership. These are basically point of sales locations where clients can order or pick up their

cars. So the current waiting list to buy a Ferrari is around three years. It is not easy to become a Ferrari client. First of all, you have to have a lot of money, which is kind of table stakes, But you also have to show that you're going to be someone who takes care of the car because the resale value on these things is very important. What happens after you purchase the car is important to Ferrari's business. So one of the big ways that the Ferrari dealership employees will vet you to see if you're good enough to be on the waiting list is, do you have prior ownership of a Ferrari? So have you bought a used one before? What did the car look like? Did you take good care of it?

Showing proof of prior ownership. So you have to buy a used one just before you can get on the waiting list to potentially buy a new one. So it's this very kind of exclusive club. I'll get more into that in a little bit, but I guess other things that are important in terms of the business model, Ferrari does a little more than selling cars. They also generate revenue by selling spare parts to their existing car

owners. Sometimes this is stuff that the car owners like need, they need a replacement part or whatever, but sometimes it's also them trying to improve their car. This is actually a pretty high margin for them. So they talk about this a little bit in their annual report. They generate advertising revenue as well. So they get a share from F1. They get advertising on the sides of the race cars.

They sell licenses to some amusement parks, which I find kind of weird. I don't know if you saw this. It's in the annual report. They're pulling back on this. I think they limited half of their licenses as they've redone, which I'll talk about in my future growth opportunities. their apparel and fashion strategy as kind of the adjacent business that's going to help supplement and build the brand for the Ferrari automotive business. They said it got a little bit too stretched and now they cut about half of those out, which is probably a good thing.

Yeah, I think that's the right idea because I was afraid it was kind of starting to go the way of Gucci where it's like, it feels so common and maybe it helps brand recognition, but doesn't really help it feel exclusive. Anyway, so they also generate some revenue from that and they have a recurring agreement with Maserati to manufacture engines for them. This has been going on since 2003. There's basically just a dedicated, I don't know if it's an entire building, but a part of their manufacturing facility in Maranello where they just have an assembly line custom built for Maserati engines. They renew the contract basically every three to four years. I think it's mutually beneficial here. It's guaranteed revenue for Ferrari, probably lower

margin than their cars, but it's guaranteed profit. So I think it's a positive for them. And then lastly, they do offer some financing to their customers. They can generate interest income on some of these loans, but generally these are customers that don't need a loan to buy a car. They're paying for this probably with cash for the most part. So it's, like I said, very wealthy folks that are, if you have more than $300,000 to shell out on a car, you're probably not needing an auto loan, but there are certain cases where it happens. So they offer that as well. Brett's going to talk about this in a little bit, but about 20% of the cars they currently sell are hybrid um i don't think they maybe they have one pure ev model uh no the oh gosh i think it's

getting unveiled q4 2025 but i i want to make sure i'm read the conference call for the full details because the analysts kept asking about this and they said the debut will be then so it was either q4 2024 q4 2025 but apparently it's been in the works for a little while now right so i guess last Last thing I'll say before I get into the history, and I do think the history is important here. Ferrari, I mentioned that it's unique, but I really can't think of any business that's like this, where every single car Ferrari builds in 2015 already belongs to someone. Maybe Hermes, but we haven't looked at it yet. Maybe we'll add a second one next week. i'd imagine they're producing more units hermes's than ferrari but yes very different very different

units um anyways just fascinating and when you get your chance to buy one you're gracious for the chance to hand over half a million dollars for this car and so typically pricing is not something that is the major concern for customers because let's say you choose to haggle over price which I can't imagine that happens a lot, but it's like you waited three years. There's a backlog of three, three years worth of people waiting to get one. If you say, no, that's too expensive for me. You're not going to get a chance to get another Ferrari. They're not going to select you and let you buy one. So very unique, lots of pricing power embedded in the business model, but let's talk through the history. Yeah. Anything else?

Let me, I'll give you a break, a little break and add two things there. You talked about the backlog. And I think an important thing to note there is that regardless of if you are a, say, I don't know, well, one of the wealthiest people in the world, when you first start out, they really only approve you for their basic vehicle, which I believe the selling price floor is maybe 150,000. I can't actually remember the exact details on that, but it's definitely elevated. They have this certain price floor that they're really not going to go under, which they call kind of the basic entry into the luxury car market. And you're going to first start out with that.

And once you are, say, you know, approved, you don't resell it, you don't mess it up, you don't ruin and tarnish the brand of the club that they talk about of the Ferrari Estas, I think it's how you pronounce it. Then you can get approved for some of their ultra luxury vehicles, the ones that are more exclusive. So you have to even start with that stepping stone within the club. And then second, Ryan mentioned the plants in Italy. There's a difference, I think, with the Ferrari heritage and some of these other luxury companies versus the mass market ones that we talked about with LVMH, where LVMH with their Louis Vuitton brand is mass market. It's very global. And they have, for example, a factory in Texas. Now, if Ferrari decided to put a factory in Texas, well, maybe that's a good thing because

they're expanding supply and earnings are going to grow, but that would be a risk, I think, to ruining the heritage, the Italian sports car. I don't know how to even describe it. Like that sort of brand is built into the factory. And if it was anywhere else, I think it would, you know, the brand would be ever so slightly weaker. Yeah. I mean, you think about it, like 10,000 cars a year, I think they have somewhere around

5,000 employees at Ferrari in total. So it's two cars per employee. Now, some of those are frontline workers. Some of those are designers, engineers, but these are slowly built, very artistic. The art form is a big part of this. It's not this mass production facility that's just spitting out cars every day. It is, but it's not nearly as much as some of the other automotive producers. So let's talk a little bit about the history because I think it feeds in.

And it's really a huge part of the brand today and a big selling point for customers. So Enzo Ferrari, probably a very recognizable name to a lot of people. He started racing for Alfa Romeo in 1924. he has been really like insatiably passionate about cars pretty much his whole life i think he even talks about it in his book where he like when he turned 11 years old he saw like his first race and he was just from there on he was wanted to do it for the rest of his life so became a racer for alfa romeo in 1924 1929 he formed the scuderia scuderia scuderia ferrari i think Yeah, I think you're mispronouncing that, but yes, the racing team.

Yeah, Scuderia Ferrari Racing Team, which was under the Alfa Romeo umbrella. Alfa Romeo had a team. They basically pulled out. I don't know if they financed it or whatever, but it was a part of Alfa Romeo's company. The Scuderia Ferrari Racing Team basically participated in all the races. Enzo was the leader there. However, in the late 30s, Enzo and Alfa Romeo's management team had some disagreements. disagreements. Enzo set out to do his own car manufacturing. He couldn't actually have the

Ferrari name for another 40 years though. That was part of that licensing dispute. I guess Alfa Romeo had the license on that Ferrari name. He wasn't able to use it right away, but World War II came along and this really disrupted operations. Like I said earlier, they basically became a government contractor during this period. Also moved the manufacturing facilities to Marinello. It wasn't until after the war that the Ferrari company really started to take off. In 1947, Enzo built the first Ferrari branded car with the dancing horse emblem that's so popular now. And they pretty much saw racing success instantly. So they won a couple of races in 1947 after building their first race car, or first Ferrari branded race car. They won the

1940 hour 1949 24-hour lamaze the the lamaze is if you've watched enzo versus ferrari it's kind of the most well-known race you said you said enzo versus ferrari it's i'm sorry for versus ferrari versus ferrari yeah um it's the most well-known race and so a lot of people all over the world kind of keep up with it people come from all over the world to watch the race and so that racing success is really what started to build Allure for the brand. Because if you're a rich person at the time, you're living in Europe and everyone's talking about the race and they say, who won? Oh, Ferrari won. And you know very little about Ferrari. Well, what's a big bragging point between you and the other social elite? Oh, okay. I drive the fastest car on earth. I get to drive

a Ferrari. And so a lot of people came to Enzo and said, well, can I buy a car from you? And so Enzo would, they would literally come to the Ferrari facility. They'd talk to Enzo. It'd be this whole experience. And Enzo would always say like, yeah, but you're going to have to wait a couple of months. It was kind of building this anticipation for it. So that was part of the waiting process, the waiting list. And they would sell cars to the public, to basically the really wealthy. And it was only as much as they needed to basically finance the manufacturing of their next big race car. So as long as it was financing the race operations, they were okay with it. They continued to have racing success throughout the fifties and sixties. And I think

66, they lost to Ford. And it was kind of interesting because Ferrari always had like financial struggles. And part of that was because Enzo was so focused on the racing operation and not really the commercial operation. And so at one point Ford offered to buy him out and Enzo was like, yeah, sure. You can buy it out, but I get the racing team. I get full autonomy. I get to make all the decisions. And it wasn't even a real offer. He basically was just prodding them along until Fiat gave a better offer. And so Fiat eventually invested, I think it was in 1967, I want to say, bought 50% of the Ferrari company, gave them a whole bunch of financial firepower to keep investing not only in the commercial side of things, but also the race car side of things.

Enzo passed away in 1988. And at that time, Fiat upped their stake to 90%. percent the business was eventually consolidated as a part of fiat chrysler however around 2014 they began exploring a public listing slash spin-off sergio marchione who's kind of a famous executive in the manufacturing world or sorry the automotive world i believe he was like the big mind behind jeep like the jeep uh i can't remember what it was wrangler maybe the one that was like just very popular. Anyway, so he took over as CEO and basically at their 2014 IPO Roadshow, he really tried to, and Sleepwell talked about this on a recent episode when you were talking to him about the luxury industry. He was trying to tell all the investors like, listen, this is not

a traditional car operation. It's very different. It is a luxury company. and people didn't really give him any credit for that they kind of didn't believe it they thought okay yeah it's better than a typical car company but it's just a premium car company well spun off they got a decent multiple i think it was around like 18 times ebit which is probably better than a lot of car companies but still not kind of what you deem a luxury company valuation so since that company was spun off. Ferrari's total return has been 620%. That is 27% annualized. It's been a remarkable performing stock in public markets. As of late, Ferrari has also been boosting production. This is not that common for them. Apparently, prior to coming public, it was

stagnant around 7,000 cars a year. However, it seems like both through a combination of wealthy people from asia particularly mainland china and the rise of formula one more and more people are wanting ferrari cars and so they're raising production a bit to match that uh to match that demand now i've gone for a while so anything you want to add there yeah i will say i have a chart of their unit volumes that will be in the newsletter so that's a good visualization for anyone that's more interested there. Second was obviously Hindsight 2020. And as you mentioned here,

they did, these companies are not impervious, even though they sometimes may trade at earnings multiples for a long period of time that seem impervious. Was the spinoff one of the fattest pitches in investing history? Yeah, I mean, there were people, I think Adam Wyden,

like talked about he's like this is not he has quotes where it's like this is not a car company kind of like this should be looked at as a luxury brand and so the people that were able to recognize what it was early on kudos to them because returns have been great uh certainly a fat pitch i will say however that things have changed a little bit in that production has started ramping and not ramping, like not going like explosive growth, but they've really started to pick up supply. So that's been a part of the revenue growth formula. I think returns still would have been quite good, but you probably would have gotten mid single digits, maybe high single digits revenue growth, as opposed to the 11% or 12% revenue growth you've gotten over the last decade

because production has improved basically 5% a year. So I don't know if that part was foreseeable, but yes, this was 18 times the EBIT. This was a really good investment. Yeah, it's hindsight. Yes, hindsight and similar to other luxury stocks at those earnings multiples, they just are so attractive, at least for us.

I think Ryan would agree with me here because they're perfect never-sell candidates, given the durability. Okay, we want to take another pause today to talk about our friends, Interactive Brokers, otherwise known as IBKR. We love Interactive Brokers. Ryan and I both use Interactive Brokers on a regular basis for our investment accounts. And the reason we love them is because they have the breadth of asset classes and geographical diversification. You can invest in options, bonds, stocks, and in all sorts of markets that you can't find anywhere else, whether it's the Nordics, where we like to research, or down in Latin America, where we also like to research,

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all right all right yeah last thing i'll say here we've looked at two luxury companies now lvmh and ferrari this to me feels like the most luxury luxury company like hardest to become a member kind of with lvmh relieve autonomy you could get a bag and it is luxury it's more expensive than everything else but this feels like when i think a luxury stock ferrari is probably the first one that comes to mind now yeah well we'll see next week uh we're going to be researching another one that's definitely in that echelon but let's hit industry and competition to understand the target market well okay we're aware that they're a luxury sports car company that's probably the two things that define it luxury and sports cars but to understand it let's kind of go for

the broader automotive market, and they just narrow down to their specific addressable market that they're trying to target. So the worldwide, there are about 70 million cars sold each year. Now, if we narrow that down to sports cars, that is 1 million sold around the world each year. And some may argue that their new SUV is not technically a sports car, and they've resisted going into SUVs because their whole thing is about heritage, sports racing, all that good stuff. But either way, we narrow it down to about a million. And then according to Ferrari's definition, there are around 50,000, quote unquote, luxury sports cars sold around the world every year. There'll be a graphic in the newsletter that you can look at this on. And Ferrari sells just over

10,000 vehicles a year, but it is growing its market share within this segment. So that's an important thing I think for investors to note when listening to this episode. And then if we go from a quote unquote luxury strategy perspective, for anyone interested in this industry, definitely recommend reading that book. If you look up the luxury strategy, it's the one that'll pop up. They look well positioned. So there are a billion people, perhaps billions, I'd say at least a billion people, maybe more that recognize this as a luxury brand or believe it is a elusive, high-end whatever brand Ferrari estimates that there are around 26 million quote-unquote high net worth individuals that can afford a Ferrari and I would remember here that many Ferrari

customers purchase more than one vehicle I think about this I read the 66 percent of their orders last year came from existing clients and then they sell just over 10,000 cars a year just as i mentioned before so they are under supplying customer demand while having uh the actual customers you know they're there's just more fans of the brand than there are people that can actually afford the car which is how you remain a luxury product uh you know we don't have to go through all that again if you want more details on that listen to our luxury overview with sleep well meandro and you know they're definitely under supplying customer demand i would say and we'll talk about whether they can maybe double or even triple supply

while still maintaining this. Last thing, side note, the global fashion industry has over $1 trillion spent every year. Ferrari has entered this market and it remains a call option, I think, for the company. I'm going to leave this here that we may like to sit on and we may discuss this when I talk about it in my future growth opportunities. But the question I have is, how much confidence do we have that they can succeed in fashion

apparel and goods? Now, let that sit for the listeners and for Ryan, too. Lastly, is their competitors. So according to their own annual report, they compete with Lamborghini, McLaren, Aston Martin, Rolls, Rolls-Royce, and Bentley, and then Porsche, Mercedes, and Audi in certain segments, which I think means kind of more of the mass market stuff. should any of these competitors worry ferrari investors is there anyone close here i think you could argue rolls royce has a similar heritage but it's a bit different where it's

not sports cars and racing it's more traditional wealth i'm not an expert gentleman ship yeah the gentleman yeah yeah that's all that's what i think about when i i hear rolls price but curious your thoughts there yeah i don't know if competitors really matter here now competitors in the racing i think could matter potentially because i do think a lot of the brand allure is from the fact they've won so many races and that was really where it started out as But today, to me, it feels like people are in the club. There's events for Ferrari clients. You feel like you're kind of a valued member. It's not just, like you said, 66% of sales come from existing clients. So there is kind of a recurring base, whereas they're not saying like, oh, should I go for the Aston Martin or the Ferrari? It's which Ferrari should I go for?

I've been on the waiting list for three years. I'm a part of the club. I go to their events. I've got probably some sort of a customer representative that I'm friends with. I've met people through these networking events kind of thing. it's more than just the actual cars themselves so i i just not sure there's that there's that much value in looking at the competitive set i i don't know do you do you agree there yeah i think it's i guess you could worry a little bit about say a lamborghini and mclaren

and aston martin if they really honed in on the strategy but it would take multiple it'd take a long time to build up that same brand heritage, the same story, all that good stuff. And it'd take a lot of work. And I don't think it would really dethrone Ferrari, but it'd make them more formidable competitors. They may have a chance there. But someone like Porsche, look, it's a sacrifice they make. But if you have in a wealthier neighborhood in the United States or anywhere else around the world, you see 20 Porsches getting driven around. That's not exclusive anymore. Okay, let's talk management and ownership. CEO is Bendito Vigna. I'm sorry if I'm not pronouncing that with an Italian accent. I think that might trip me up here a

little bit talking to all these managers. He came over to Ferrari actually in September 2021. So recently new as a CEO, and it was from a microelectronics and sensors company. You might think that's not relevant. But for a car these days, lots of sensors, lots of stuff working together and it does actually fit. And he had worked with that company since 1995. Do you have any concerns that Vigna has no experience running a luxury company? Not really, because there's a lot of luxury type executives that they already have. I think with the ceo they want it to be someone who's more on the engineering side yeah and i mean that's kind of their history they've had they've had a couple ceos that were previous race racers um and so

i don't want those i don't want a racer as a ceo of any company the uh yeah maybe not anymore but But I think people that have been around the cars for a long time is kind of who you want in the CEO seat here. Maybe if CFO, you might want someone else. You might want people on the board that are from luxury type companies. But I think CEO, you want someone who understands the day-to-day operations. Yeah, and if you're looking for a guy that can scale from 10,000 to 20,000 vehicles while maintaining the engineering expertise, this is probably a good candidate. I think the marketing lead is also important for a company like Ferrari. It's so vital for a luxury company to maintain that balance.

It's very delicate because you can really ruin it within a couple of years if you just totally screwed up your marketing strategy. Their chief marketing officer has been in that position since 2010, which I think is a good thing. You want consistency from a marketing strategy with a luxury company. And then if you look at the board of directors, They seem to have a great board, and I think it can kind of be important here. Obviously, it's not going to be a game changer, but you have the chairman is the CEO of Exor,

who is also the chairman of Stellantis, which is Ferrari's old parent company that owns Fiat now. It's kind of confusing, but not too relevant today. Well, actually, it will be when we get to the ownership here. They have the son of Enzo, who is named Piero, and then Delphine Arnault, who is the daughter of Bernard Arnault and head of Dior. You have the CEO of St. Laurent. It's the one that starts with Y-V-E-S. Don't know how to pronounce that one. Another luxury company.

You have the Apple Senior VP of Services, which I could get maybe their hardware person, but I'm kind of confused what the services guy is here. Kind of feels like the Big Bird guy in the conference room. And then you have the COO of Chanel, which obviously makes sense. And then if we go to ownership, there are two meaningful stakes, Exor, which is a investment company, and Piero Ferrari. Exor has a 25% economic stake. Piero has about 10%. However, due to some strange voting mechanisms, which are the exact details aren't important,

but the outcome kind of is here. Exor has a 36% voting power and Piero has 15% voting power, giving them a combined 51.7% voting power of this business. They do control it. And with shares outstanding coming down, this ownership or voting power may increase. And I think you can see that they are incentivized not to dilute the share count. And they might be incentivized to buy back stock regardless of price because they want to keep that majority ownership. Executive compensation, I thought the key takeaways reading it were that bonuses are based on relative total shareholder returns and EBITDA targets, not great. It's fine. I think a yellow flag for me was too much focus on EBITDA

and EBITDA, which I'll have some charts going through all the different details and graphics that people will need to know was relating to cash flow and net income and stuff like that. It's not relevant for a company spending so much on capital expenditures and overstates Ferrari's earning power. So the fact that they focus so much on that is a little bit of a concern for me. Okay. Earnings, Ryan, let's go through some of the big takeaways here as we try to chug along here throughout the show. Yeah. Only other thing I'll add on the management side before I get to earnings, I don't know enough about Benedetto Vigna to really say whether or not he's suitable to be CEO, but he did an interview with CNBC not that long ago where I thought he

said a lot of the right things. So he said, we are a brand that is not looking for volume. We are a brand that is looking for value and respecting the client. He also says we could make more, but that doesn't make sense. We will offend our clients. And I think that's a big part of it where if you make too much, the exclusivity and the feeling of the status symbol that is Ferrari starts to erode and it doesn't feel as valuable to the clients. The clients would much rather pay a higher price, but still maintain that status symbol that the Ferrari has given them. So I think he's got a good sense of business.

Okay. I think I had this discussion question for later, but I did post it on Twitter. Maybe I didn't post it here. I think it's a good timing over that because you talked about him managing the unit volumes. They are raising production. So let's say in 10 years, 2032,

compared to 2022, they have doubled unit volumes to 20,000. do would you worry at all about ruining the brand uh and having a little bit of brand dilution and that exclusivity stuff not really i don't think so yeah they're selling 20 000 versus 10 how many ferraris have you really seen on the road i can't remember the last time i saw a ferrari well yeah it depends what uh i mean it depends definitely what city you are like if you live in miami probably people showing those off but i think no even depending on what even if you're in the richest neighborhoods you're not seeing them constantly like you might see a even a rivian now

on the west coast of the united states even a tesla you know the higher end tesla ones or even you know porsche i see all the time um i think they have plenty of room before they reach that and they could even go the louis vuitton route and become mass market and that would probably be fine because the brand is so strong but before they even hit that threshold of going from hermes to lv i think it's plenty of volume ahead here and they they'll probably never get there and they can always move the mix to to like more supercars as opposed to the range models like if reminds me of america they want to move revenue up without really just with if they're concerned about you know diluting the brand or something they can sell more supercars and still boost revenue just

because of the pricing mix yeah it's reminds me a bit of american express balancing their different tiers where you can always add a you know make the black card more exclusive or however you want to describe it yeah okay but yeah it feels like there's a lot of levers they can really pull um yeah well let's keep going we're going long 5.8 billion in revenue over the last 12 months 5.8 billion euros, I should say. Most recent quarter, they were growing revenue by more than 20%. We mentioned it. They have been growing production a little quicker as of late. So not very common for them, but I think they had a whole bunch of what they felt was unmet demand. And it seems like demand has really gone up lately, especially... I mean, you can't really

just attribute it to being the wealth effect at this point, because it's not like markets are just where they were in 2022. It seems at this point, there's just really, really strong demand and no one has a better purview into that demand than Ferrari themselves, because they see the waiting list, they see the applications, they see all that stuff. So yeah, they're seeing really strong revenue growth, 50% gross margins, which I think when you're describing, okay, why is this not a car company, you could probably just show them the unit economics. You could just say, hey, 50% gross margins. What other car company has that? 27% operating margin. Free cashflow does often lag, especially right now as they've added some production.

And they talked about this in the annual report as well. Before the launch of a new model, they'll have a big inventory buildup. So you'll see that free cashflow lag. I think basically the best way to value them is earnings before taxes or no bet. I look at the conversion though, it is a disadvantage of this business model. We've talked a lot about how it's an attractive company. And when we get to the earnings multiple, you can see that basically everybody agrees with us there, but I would say the cashflow conversion is a big downside for me. Yeah. I think the big summary here, Ferrari's earned about $1.5 billion in EBIT or sorry, earnings before taxes over the last 12 months. When we look at the balance sheet, nothing's

really that important here. Ferrari reports $2.8 billion in total debt, well, 2.8 billion euros. 1.1 of that is what they call asset-backed financing. I believe this is loans made to customers. However, Ferrari themselves is actually technically selling these to the dealerships. So I'm not sure if it's like dealership receivables or actual end customer receivables. Either way, it's backed. The Ferrari vehicle itself is collateral. I imagine a lot of these are getting paid off. Not a big concern here. It's potentially just financing for the vehicles. And you think about it, $1.1 billion out of what, probably 50, their entire loan book here is $1.1 billion. And they've sold like $20 billion worth of cars over the last four years. So not a lot of their cars are sold with financing.

If you strip that out, they have the remainder is what they call industrial debt. Just think of this as like general corporate debt. Ferrari has a little over a billion euros in industrial debt, but they also have a billion euros in cash to match it. So I don't know, went a little long there, but basically zero net debt. There's like, whatever, 200 million euros in net debt. So the market cap and enterprise value should be roughly equivalent. Yep.

Okay. That lays right into the earnings multiple. So market cap in US dollars, we got about 67 billion, and they've generated about $1.27 billion in net income over the last 12 months. So that gives them a expensive PE of 53. And I think net income is fine here. You can use earnings before taxes. Basically, it's very similar to net income because free cash flow is inconsistent. I think, though, they talk EBITDA up a lot. They hype that up and all that good stuff. I think it consistently wants to track you know, EBITDA, free cash flow, net income, and the conversion from one from EBITDA to both

free cash flow and net income. And just the relationship there, because if you see a distinct change that could indicate some financial shenanigans, they are always talking up the EBITDA metric. I think you want to make sure that you're actually getting value created to as a shareholder. Well, let's move to anecdotal evidence, Ryan. I think a lot of people have an opinion on the brand here. I don't, you know, it's good. It's good. I mean, that's pretty clear. like he they do a great job and everyone seems to think wow high quality yeah that's the other thing beyond just the brand the actual like products that they're selling are pretty cool you know just like pretty i don't know i wouldn't know i wouldn't know if i'd call them engineering

marvels but like if you saw one and it didn't even have the logo it's probably something you want to step into um future growth opportunities the or sorry anecdotal evidence there is the story i spoke with um i believe his name was akrif akraf kareem um he's an analyst at ensemble capital we spoke with him like three years ago and he he went to one of these ferrari events in italy and the scene that he described was pretty cool so he said basically a whole bunch of people, wealthy looking people, elbow bumping, networking, and there's all these really cool cars displayed. He said he saw this one pretty tall dude basically trying to contort himself into this tiny... I mean, these Ferrari vehicles are pretty low to the ground, contorts himself in

and he was kind of laughing and he says, oh, you're going to buy one? He says, I already bought one he said i bought this a long time ago uh and it's just kind of to him it was like oh okay wow like these i don't know it's just such a powerful business model that people are buying these vehicles before they ever step in one they don't know what it's going to feel like and they're buying one because you know they want to be a part of the club i know we've talked about that a lot today, but I imagine if you go to one of these events, it kind of locks you in as a client. And if you have the money to afford one, you want to kind of continue to be in it. Yeah, I agree. Clearly, you know, great brand. And I think reiterating the F1 aspect is important

because I do think it is a great competitive advantage in a form of marketing that is going to be hard to be replaced there are a lot of other companies that are in the f1 series including aston martin but none have the fandom the heritage it is impossible for anyone else to be the only car that's been i think in what every grand prix i forget it's something like that but like since 1950 or whatever it is and they do a lot of the little things right to make them seem elite exclusive attractive all that good stuff and some people might laugh here as i put this note in but I do not think it is a coincidence that both of the Ferrari drivers for their F1 team are from Southern Europe and extremely attractive.

I don't think that's a mistake. They are essentially models for the Ferrari brand. That is more important to them. They're not going to get some, like, we're not going to be their drivers, even if we were better drivers. I don't think that's happening. We're not going to be there. You know what I mean?

i suppose i like to think myself is all right looking but i suppose it's true yeah it is nice to have them as sort of icons for the wealth and status that is ferrari yeah and look the sports car and the winning is important too and if they i don't think they've won a constructors thing since like 2008 which is people be like wow how does that relate to the business but look if they don't win like you're eventually going to lose that you know um brand of oh we're the best you know the the pinnacle of racing as they like to call it but let's get future growth opportunities this is an interesting business so ryan i'm curious your thoughts here yeah i don't know i mean it's tough because it feels like we've been getting a little boring

lately with some of these future growth opportunities, or at least I have. But I think they have room to keep increasing production without really eroding the brand. And like we talked about, there's different levers they can pull. They can increase the prices on the supercars. They can increase production of the supercars and limit the range vehicles, that kind of thing. So I think continuing to increase production at 5% to 6% a year is very achievable. Pricing power is a given here. So I think the runway for growth is certainly there. The other growth opportunity I have here, I said maybe chill on the buybacks a bit. There's no reason for them to be buying back stock at 40 or 50 times EBIT. It just doesn't

really make any sense. Yeah. That's a lot of the balance sheet, especially with the fact that they can actually earn some yield on that um yeah i agree with you there okay i i think for mine it's maybe not too relevant but i think it'd be nice to spend some time discussing the discussing the expansion into uh ferrari as a fashion and apparel brand uh they're now selling kind of four-figure clothing items a little bit of watches and other items that are not strictly automotive but do have the ferrari brand the ferrari logo whatever you might call it it's Sponsorship, commercial, and brand line item is now 10% of revenue, but not all of that is from apparel.

Apparel is still extremely small. I think the discussion question I have here is, how likely is it that in 10 years, Ferrari is doing $1 billion in revenue from luxury goods outside of automotive? Some of these fashion and apparel brands, and I would reference here that the industry globally is about $1 trillion, and they're starting at a pretty good spot. i will say for a company of this size it's probably not relevant from a financial perspective but more of making it look like a that exclusive club that exclusive brand that people want to be a part of i imagine a lot of it has to do with the uh for growth of formula one tv deals

sponsorship deals i don't know if apparel will ever be that big i don't really want it to be that big i don't know i worry that trying to put too much resources and effort into apparel that would be one of the quickest ways to erode the brand now if they manage it properly they do it the right way sure it can help but it feels kind of risky to me so i do think i think they can get to a billion dollars and kind of that sponsorship and advertising revenue but i hope It doesn't come from apparel. Yeah, well, I will say maybe to assuage some of your concerns, if you look at the, I checked out their website for some of their products and they are absurdly expensive. So I don't think we're going to be seeing half the people out there wearing those products, which is good.

Let's get highlights on lowlights though. We've talked a lot about what we like, but maybe just what we want to reiterate for listeners here, Ryan, of the attractiveness and some lowlights in the business. Yeah. In general, I think it's a really wonderful business. Like I said, it's not even really like a company sometimes. It feels almost like – so with most companies, it feels like profit margin is like the byproduct of people running their business. Because in this case, it almost feels like profit margin is what they choose at the beginning and price of their commercial vehicles is the byproduct. Basically, if they want to get to 28% margins, they're going to produce 10,000 vehicles. Here's how much we need for everyone to pay kind of thing. And it's probably not that clean, but it's just such a powerful model.

And it leans more towards that kind of system, I would imagine, where they can pick which price they want to achieve whichever margins they need. it's probably impossible to replicate the brand if you're trying to build a company like this because so much of that racing heritage like people see ferrari and especially with like the movies coming out god that's that's such good marketing for them being included in all these races like all the all the previous racing wins that they've had it's just very it's really good marketing impossible to replicate for a startup today yeah i would say the caveat there is it's impossible to replicate in say 25 years it's going to take you a long long time yeah yeah

and i like that i don't know i just think enzo ferrari was unique and that i think people associate Ferrari with Enzo Ferrari and Italian craftsmanship and just, I don't know. There's something there that's very unique to Ferrari alone. But last couple of things I'll say here, I think they're pretty much recession-proof. They saw a slight dip in sales in 2009, but I imagine that especially now that the backlog and the waiting list is a lot longer, it would take quite the economic hardship for people to choose not to buy their cars. So I think it's generally recession-proof. Low lights, the growth of the business in Asia, we had the same problem with LVMH.

I don't think it's that big of a deal because there's not that much concentration on the Chinese market, but it's just helped them really boost production lately because demand has been really strong. I don't know. Maybe there's some way that that kind of rebounds back the wrong way. We'll see. yeah i mean if cold war 2.0 gets yeah if cold if cordial hold or 2.0 as you might want to call it gets materially worse that's out of their control yeah there really aren't that many low lights to me i mean you talk about capital allocation here yeah they probably didn't need to buy back but i don't know if there's that many low lights for me yeah a little electric vehicles in mind

um what you think some people might be on the top of their mind because That's what a lot of people seem to bring up in relation to the stock. But yeah, my highlights, same thing on the brand, you know, expertise, marketing and F1. Like we talked about, they're definitely undersupplying demand still. I have no worries there. And they are definitely in the right wheelhouse of using a proper luxury strategy. I would sum it up like this. There are billions that are aware of the brand.

Okay, at least a billion. There are tens of millions that can afford one, but only 10,000, maybe 20,000 in 2030 that can buy one each year. That's a good position to be in. Low lights, capital allocation, good. And only like 4,000 new people. A lot of these are existing clients. Yeah, exactly. And a lot of it's repeat customers.

Low lights, capital allocation, fairly poor. focusing on EBITDA, hiding R&D and CapEx, which we didn't talk about, but check out their earnings statements. They put a lot of research and development in there and then talk about EBITDA and it's like, okay, well, that's fake. And then repurchasing stock when the earnings ratio is above 50 times. I mean, come on, let's not do that. I think they are also disadvantaged versus a brand like Louis Vuitton, where there's a need for true innovation, R&D, and all that stuff making its vehicles, instead of just saying, okay, we're going to sell the same bag every year. They are a work of engineering, not just kind of the art, as its fans might say, which is going to

require more costs. So I don't think they're going to get to that elusive 60% margin, like the leather goods industry can. Then the big low light that I think people have concerns on the horizon is the transition to electric vehicles presents, I would say some complications from them. Here's a quote from the recent conference call. A few other luxury premium car makers have noted that At the very top end of their product ranges, the customers, particularly in China, have a strong preference for internal combustion engines as similar to a watch. They believe the mechanical elements have a higher level of craftsmanship and value compared to electric and digital offerings. But given, especially because they're in Europe and we've covered some European companies and the ESG stuff over there has gone absolutely crazy and there's all this focus from their customers and things like that. By 2030, they expect to go 40% full electric vehicles.

Now, I think they've talked about how there's some people that like the internal combustion engines, some people that want hybrid, and there are some people that actually would prefer an electric vehicle because that's what they believe the future is, and maybe they like it better. I think it maybe presents some uncertainty for them, but I don't think it's going to tarnish the brand. the one concern though is that engine sound and i think an artificial engine sound people might think that's dumb but the engine sound of a ferrari is vital to the brand yeah i don't

people talk about how maybe ferrari doesn't have the same value in an electric vehicle world and I remember thinking about how that was the big risk going into, I think, around 2019. I remember thinking that's a huge risk. I think they've done a good job so far evolving. I think the hybrid is the way to go. I think they're obviously getting a lot of demand from customers around the hybrid vehicles that they're putting out there. I don't know.

I think it still carries a lot of value, even in an electric vehicle world. fully electric though it's it's i think it's less valuable still the best but i think it's it's it's less it's it hurts them if you kind of get what i mean like it's not it doesn't change the game and ruin the entire business but i think it hurts them it's not a good thing yeah it's definitely not a good thing but it's uh well we'll see i wonder how how well their their first full ev will sell well yeah okay let's say it could be a good thing for their financials but it's not a good thing for the moat yeah that's probably right all right let's uh let's go bull case and bear case here because i think this is maybe what people want to hear people might already have an

idea of what we're going to say given some of the valuation stuff but i want to just put some numbers behind it so that people have an idea of kind of how expensive this really is sorry i know I just preface that it's expensive, but let's say they grew their revenue by 15% a year for the next five years. That would be well above what they've done over the last decade. Revenue has grown at about 11%, but it's growing faster right now. So there's the chance that maybe it evens out to 15% a year annually. And they take their EBIT margins, earnings before interest and taxes, from I believe it was at 24% to 32% in five years. So significant margin expansion there, I would say. That's about 3.3 billion euros in annual EBIT. Let's say the market values them

at 30 times their EBIT in 2028, which is, I mean, that's pretty expensive. Yeah. I could see them being higher, but yeah, slightly conservative, I would say. From my feel, I think that's crazy, but I think it's a good number. Yeah. 30 times EBIT, 2028, that would put them at a $99 billion market cap. I think today they're right around 67 billion. So 15% revenue growth. Margins go from 24% to 32%. They're valued at 30 times in the last year. It would result in 48% total return over five years, less than 10%. It's not very attractive, in my opinion, that risk reward. Yeah. I think your scenario is doable or it's realistic. I kind of think, yeah,

that's probably could happen but the returns like it's you know it's not crazy it's not like okay well it could be 200 250 kind of over five years or you know maybe even a little less and a lot of people are pricing this in and yeah i have this kind of similar thing you know it i think it's clear that they can grow revenue by 10 a year kind of into perpetuity but at 50 times earnings i think you're kind of still betting if you want that upside that the stock is going to stay near 50 times earnings. You're not going to see hyper growth here. Margins are not going to double because they need that R&D spending, especially with the transition to electric vehicles. Yes, you could bet on this as a terminal grower.

I don't hate it as a never sell candidate of say, okay, I'm going to buy this for 50, 60 years kind of coffee can it i wouldn't hate that but it's just not like this is kind of leads into more just not how i like it like the also yes exactly that that's just not a realistic way to invest and i think you would have a buy there could be look there's got to be a chance at a buying opportunity at a lower earnings multiple just look at the historical rates of some of these luxury companies and if they mess up at all with the growth formula the stock is going to retrace to a much lower earnings multiple and i think you could have a better buy here which kind of leads into more interested yes i'm more interested but i wouldn't buy it around 30 times earnings

yeah i think that's great i think 30 times earnings is cheap for this company right if it was at 30 times earnings right now i would be all over that is cheap yeah but i also think there's a case where they don't really grow production that much they choose to prioritize their current clients they want to maintain their existing value they're worried about potentially deleting the brand whatever not focusing on stockholders yeah production remains flat i think that's very possible and so yeah in that case it's hard to support the valuation here and even at 30 times earnings i think that'd be if you're just getting kind of six to seven percent price increases every year that's not 30 times earnings

yeah it depends what margins are but like 30 times earnings i don't think there's much risk of multiple compression for a luxury a company that's at a true luxury stock if you know what i mean yes there there is but i think it's a company that deserves to trade at 30 times earnings yeah i love the business i really do it feels so unique and impregnable really i don't see how it could be disrupted but i'm never gonna buy it at 50 times earnings it's just not gonna happen yeah i mean i agree with you it's like nowhere near a price i'd want to pay the other part that kind of frustrates me when it first came public maybe a lot of people didn't know about it at this point it seems like it's gonna have a hard time getting to 30 times earnings because everyone

knows how high of a quality business this is yeah i mean it's a good way to end it uh next week we're talking hermes uh don't actually know much about this one so i think it's gonna be fun we are really diving into the european companies which is quite frustrating to research but hey that's what we're doing they're the luxury stocks that's uh let's hit the disclosure we are not financial advisors anything we say on the show is not formal advice or recommendation ryan i any guests on the show may own stocks that we discussed on this podcast we may have owned them in the past and we may buy or sell them in the future thank you everyone for listening i like that what ryan said at the beginning there if you enjoy this episode tell a friend and give us a five-star review on

spotify or apple we're going to be like the brands here where we just reiterate that in their heads because that's the best way for us to grow and subscribe to the sub stack to get the show notes okay thank you everyone we'll see you next next time.