Trader Talk

Ferrari's IPO predictions raise eyebrows

Source: Mike Maez | Gooding & Company

The book for the Ferrari IPO is expected to close Monday afternoon. It is scheduled to price Tuesday for trading at the NYSE on Wednesday.

It's all fabulously sexy and exclusive, and the IPO at the NYSE will be a scene. There will be lots of blazing-red sports cars outside the NYSE (not inside), including a few famous collectibles, I'm sure.

They're seeking to float roughly 10 percent of the company: 17.2 million shares at $48-$52, so at the $50 midpoint that would be $860 million, valuing the company at close to $10 billion.

The Ferrari family owns 10 percent; Fiat Chrysler owns the remaining 90 percent, but Fiat Chrysler's stake will be reduced to 80 percent after the IPO.

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Let's start out with the good news: Everyone loves this deal. Everyone.

"Bob, I'm getting calls all over the place on this one," one IPO trader told me. He wasn't getting calls on Albertson's. Or even First Data.

Why? What's the secret sauce? It's pretty obvious by some of the comments I was hearing from traders and the IPO community:

"This thing oozes sex appeal. It's the Hermes of cars, the Ferragamo."

"You might not be able to own the car, but you can own the stock."

But that's the problem I have with this: they are trying to position themselves exactly that way; "We are NOT Ford, we are NOT GM. We are a luxury brand item that deserves to be ranked among the luxury brand items of the world."

Indeed, the company proudly claims "The world's most recognizable luxury performance sports cars." I have no doubt they are right.

But I have concerns for investors. I don't want to go into a long discussion on the financial numbers; suffice it to say they are definitely positioning themselves with an Hermes valuation, not a Ford.

On the surface, Ferrari's numbers are stellar:

Vehicles shipped in 2014: 7,255
Net revenue: 2.8 billion euros
2012-2014 compounded annual growth rate (CAGR): 11.4 percent
EBIDTA: 693 million euros
2012-2014 CAGR: 10.0 percent
Net Profits: 295 million euros
2012-2014 CAGR: 6.6 percent

Here's the problem I have. They are making two core assumptions that are questionable:

1) Their brand will increasingly appeal to wealthy people. They say they can lay claim to an "ever expanding population of HNWI" (that's high net worth individuals, for those of you not familiar with the lingo of the wealth-watchers).

2) The wealth of the ultrarich will continue to rise in an essentially straight line — for a long time.

Ferrari revs up for its IPO

The second claim is especially problematic. They are anticipating that the wealth of the ultrarich will grow at an 8 percent compounded annual growth rate (CAGR) from 2014 to 2017.

Not surprisingly, they are expecting particularly strong growth among the rich in Asia-Pacific, where they are expecting wealth to grow by 10.3 percent annually from 2014 to 2017.

Anyone who is looking at China, or anyone listening to Burberry this week and noted a sharp slowdown in luxury sales in China, should take such assumptions with a grain of salt.

They do make an interesting claim: that their net revenues, which achieved a 7 percent CAGR from 2005-2014 was "almost untouched by the financial crisis." Here is another assumption: that the ultrarich will not be affected by any future global downturn.

Do you believe that is going to happen? OK, fine.

There's another problem I have. They claim they are going to be growing. But they also make claims that they are super-exclusive. And they are — 7,000 cars a year is pretty exclusive. But do growth and exclusivity go hand-in-hand? I'm not so sure.

Neither is Aswath Damodaran from the NYU Stern School of Business. He was on our air Friday morning and immediately said that he thought Ferrari was worth $7.2 billion.

That is well below the roughly $10 billion the IPO would imply. His argument is that if they want to increase their valuation, they are going to have to dramatically increase sales.

But, he argues, they will not be able to keep their margins and the price premium if they dramatically increase sales. They are going to have to cut their prices.

His point is, you can go for: 1) low growth, high prices and high exclusivity, or 2) high growth, less exclusivity,and lower prices.

But you can't do both. And Ferrari implies that it can.

There's plenty of other little pieces they throw in to indicate they can grow sales and — equally important — brand recognition.

1) They have a "controlled production and distribution model" that creates waiting lists, driving up prices for new and aftermarket cars.

2) There's plenty of plans to grow into "adjacent lifestyle categories." In addition to the licensed products, there's Ferrari stores and even theme parks planned. A Ferrari theme park opened in Abu Dhabi in 2010 and another is slated to open in Europe in 2016. But they don't own those parks.

Look, I get it. Ferrari oozes sex. With one of the most recognizable brand names in the world, it touts a stellar racing history, technological leaders, superior talent, regular new model introductions, exceptional client relations and even owners' clubs.

And I'm sure initial demand will be there, partly because they are only floating 10 percent of the company, and a lot of stock will get sucked up by Europeans.

But keep this final thought in mind: Fiat Chrysler has said it is planning to distribute the remaining 80 percent of shares to shareholders in January of next year.

Luxury or not, that's a lot of stock that's going to be dumped on the market in three months.

Correction: This version was updated to reflect that Fiat Chrysler owns 90 percent of Ferrari, and that Fiat Chrysler's stake will be reduced to 80 percent after the IPO.