There are many valuation methods available to value Ferrari. We believe investors should use a combination of discounted cash flow and trading multiples (valuation multiples) to value Ferrari. First, let’s have a look at valuation multiples and then we’ll discuss the DCF (discount cash flow) valuation method later.
Investors can begin with valuation multiples such as forward enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) and forward price-to-equity multiple.
Forward PE ratio multiple
Forward PE (price-to-earnings) multiple takes into account the equity portion of a company. As of January 7, 2016, Ferrari’s forward PE ratio based on forecasted earnings for the next 12 months (or NTM) stands at 25.8x against the peer group average of 7x. The select peers in the chart above including BMW, Daimler (DDAIF), and Renault are among the top market players in the luxury car segment. Fiat Chrysler Automobiles (FCAU) also has expansion plans in the luxury car segment with its brands like Maserati and Alfa Romeo.
Ferrari is expected to witness high growth in earnings with relatively lower leverage than the industry average. This could be a reason why Ferrari has a high forward price-to-earnings multiple.
Forward EV/EBITDA multiple
The EV (enterprise value) to EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple is a good tool for valuation that takes into account the entire enterprise value instead of just the equity part.
Ferrari has a forward EV/EBITDA multiple of 10.80x as of January 7, 2016. It’s higher than the peers shown in the chart, as Ferrari makes higher cash return on capital employed than its peers.
This enterprise value multiple also remains unaffected by the differences in depreciation accounting. That is why it makes the comparison between companies relatively easier against the comparison of price-to-earnings multiples.
Discounted cash flow
What makes the DCF (discount cash flow) method appropriate to value a growth company like Ferrari (RACE) is that the company has predictable cash flows. In order to arrive at the present value, one would discount the company’s future cash flows for the time value of money. Note that as of January 8, 2016, the iShares U.S. Consumer Goods ETF (IYK) invests nearly 6.2% of its portfolio in the auto manufacturing sector. Ford Motor Company (F) and General Motors (GM) together make up nearly 4.5% of the fund.
In our next article, we’ll talk about how various factors can affect the company’s valuation multiples.