But Motley Fool analyst Daniel Miller believes there are some great stocks with promise out there. While Tesla ($TSLA) has already been discussed, luxury supercar manufacturer Ferrari ($RACE) is what Miller has in mind. The unique nature of these car companies makes Miller call Tesla a technology company and a luxury producer. Focusing on the latter, Ferrari has been classified as “overvalued” by Morningstar, and trades at a premium of 59% to its target price. So how does Miller reckon this to be a buy?
Significantly Higher Margins
If you look closely, Ferrari’s margins are significantly greater than what other automobile manufacturers can boast. Miller provides the following chart for reference:
A Pedigree Other Manufacturers Can’t Boast
Ferrari has a tremendous brand image, and its pricing power is second to none. It’s an image that has been built over decades since the company branched out from Alfa Romeo back in 1947. Since then, its cars have won countless races in the prestigious Formula 1 World Championship and the Le Mans 24 Hours.
During those years, it has manufactured expensive but iconic sports cars. Over the decades, the company has gone through many tough times and was acquired by FIAT in the late 1980s. In October 2015, Fiat Chrysler Automobiles (FCA) separated Ferrari S.p.A. from the rest of the group to make it an independent entity. FCA sold the ownership stake it had, and Ferrari N.V. then started trading in the New York Stock Exchange.
Unmatched Brand Value
The image the company has built over the years of manufacturing the finest supercars (high-end sports cars) is something other automobile manufacturers cannot look to attain.
Morningstar reports that the company’s average revenue growth in the past 15 years was 8.1% while average sales volume growth was 5%. That shows Ferrari has really strong pricing power.
Ferrari has also shown itself to resist economic downturns more than other auto manufacturers have. That’s because the company’s target consumers are extremely wealthy and can resist downturns and changes in purchasing patterns of the conventional or mainstream automobile consumers. Unlike most other car companies, Ferrari isn’t bothered as much about increasing its market share or sales because it isn’t a mass automobile manufacturer.
Entry into the Lucrative Ultra-luxury SUV Market
Regarding the future plans of Ferrari, the company plans to enter the SUV race, albeit later than most other luxury auto manufacturers. In 2022, Ferrari will have its first SUV, the Purosangue. This will give the company an entry into a new segment, the ultra-luxury SUV sector. It is estimated that the Purosangue will start at $350,000. That makes the segment more lucrative for the company and could positively influence its bottom line.
Ferrari is also having a successful spell in the Chinese market. We have seen the luxury vehicle market in China thriving. Ferrari can expand its production volume in accordance with the rising demand. This can happen even without the company diluting the character of its brand.
Capability to Ramp up Production Volume
Miller quotes Tom Narayan of RBC Capital, who says that Ferrari has the potential for an annual production volume of 15,000 units, a significant growth from its current volume of 10,000 units without having to significantly raise its capital. In the coming years, Ferrari could enjoy even higher margins. That makes it attractive from a long-term investment point of view.
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