Valuation multiples

Ferrari (RACE) has a forward EV-to-EBITDA[1. Enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 9.5x for the next 12 months. It’s significantly higher than the multiples of its peers. This is partially because Ferrari makes a higher cash return on employed capital than its peers. The market values Ferrari as a luxury brand that commands a higher valuation, unlike the capital-intensive auto industry.

Could Ferrari’s Racing Team Affect Valuation Multiples in 2016?

The forward EV-to-EBITDA multiples for Ford Motor Company (F) and Toyota (TM) are trading at 2.8x and 4.7x, respectively.

Fiat Chrysler Automobiles (FCAU), the former parent company of Ferrari, has the lowest EV-to-EBITDA multiple among peers as you can see in the chart above. A forward EV-to-EBITDA multiple tells us how a company is valued for each dollar of EBITDA.

A low-risk profile

The area of research and development is important to Ferrari, and it spends nearly 20% of its net revenues there. It’s important for investors to note that the company’s existing business model doesn’t require high reinvestments for future earnings growth. Ferrari‘s healthy cash flow cycle further reduces its capital requirements. Unlike other automakers (FXD), the company manages to receive payments for the cars it sells before it pays its suppliers.

Ferrari’s current business model of maintaining exclusivity with low production also helps it maintain low working capital requirements. Along with these, a healthy cash flow could lower the company’s risk profile when compared to the businesses that require high reinvestment. This low-risk profile may also drive the valuation multiples higher.

Scuderia Ferrari

Ferrari’s brand image is highly dependent on the success of its racing team division, Scuderia Ferrari. This brand image is critical for the company when it comes to preserving its pricing power. The racing team’s performance has been poor in recent years. Any continued poor performance by the team may negatively affect Ferrari’s brand image among motorsport enthusiasts. Therefore, investors should also keep an eye on Scuderia Ferrari’s future performance.

We’ll be posting a series of articles to update investors soon after the company’s earnings release on February 2, 2016.

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