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To celebrate the initial public offering of Ferrari (NYSE: RACE), company execs took over the New York Stock Exchange to ring the opening bell on Wednesday.
There was lots of excitement for the Ferrari IPO. The Wall Street crowd loves exclusive, high-end products. And few brands have the cache of Ferrari, whose cars cost more than most houses in the United States.
The Ferrari IPO was priced at $52. Shares jumped as much as 17% during its stock market debut, before closing the first day of trading at $55.
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Just like its cars, Ferrari made its IPO extremely exclusive. Only 10% of the company’s stock was sold to the public in the offering. The rest is off limits … for now.
That’s because 80% of Ferrari remains owned by Fiat Chrysler Automobiles (NYSE: FCAU), its previous parent company. The son of founder Enzo Ferrari owns the remaining 10%.
Ferrari execs ring the opening bell on the NYSE. Photo: Zuma Press
Is Ferrari Stock a ‘Buy’?
The Ferrari IPO hype is now in the rear-view mirror. So what’s next for Ferrari stock?
Prior to the IPO, analysts had predicted a valuation range of $4 billion to $10 billion. Yet at $55 per share, Ferrari now has a market capitalization of $10.5 billion. With the company trading above that range, it’s worthwhile to dig into the business to understand why.
Ferrari sells premium sports cars, including six models for the 2015 model year. The list price on those cars ranges from $198,000 for the Ferrari California to $319,000 for the Ferrari F12.
The new Ferrari 488 Spider. Photo: Associated Press
One way the company keeps prices high is by intentionally limiting the number of cars produced per year. Enzo Ferrari used to say, “You should build one less car than the market demands.”
This week Ferrari Chairman and Fiat Chrysler CEO Sergio Marchionne told CNBC, “We need to grow the demand side before we increase the supply side.” Last year, the company produced 7,255 cars. Plans call for production to ramp up to 9,000 cars annually in 2019.
That translates into annual production growth of 4%-5%. The recent growth at Ferrari hasn’t been great. Last year’s revenues grew 18% to 2.7 billion euros. Meanwhile, net income grew just 8%. Those results are decent. But they need to be considered in the context of the stock’s valuation.
Ferrari stock is trading at a lofty price-earnings multiple of 31 times last year’s earnings. That’s rich for an automaker, when you consider that General Motors (NYSE: GM) has a P/E of 11 and Ford Motor Co. (NYSE: F) has a P/E of 13.
Of course, even Ferrari looks cheap compared to Tesla Motors (NASDAQ: TSLA). That stock trades around $210, following a recent sell-off. Even so, the stock is trading at around 100 times 2016 EPS estimates. On the other hand, Tesla is expected to grow its sales at 61% in the next year.
Make no mistake: Ferrari is an exclusive brand and attractive company. But the stock is simply overpriced today.
The reason is simple. The earnings growth rate has been less than 10%. Yet as I mentioned, the current stock price means shares trade at a P/E multiple of 31. Typically, higher P/E ratios are justified for higher-growth stocks. But with Ferrari, investors are buying a slow-growth company at a premium price.
I’d bet the premium disappears in the coming months. The small IPO offering helped juice initial demand for Ferrari stock. However, that can only prop up the stock in the short term.
Remember that Fiat Chrysler still owns 80% of Ferrari stock. In 2016, Fiat plans to spin off and distribute its Ferrari stock to shareholders. That in turn could flood the market with Ferrari stock and send shares lower.
Don’t bother buying Ferrari stock today. Instead, take a look at these up-and-coming IPOs. Click here to learn how to buy the fastest-growing companies … before they go public in 2016.