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 Few would question the business acumen of Sergio Marchionne,
redoubtable chief executive of Fiat Chrysler Automobiles (FCA), but
his strategy for squeezing every last drop of value from the listing
of the group's illustrious Italian sports car brand has certainly
raised a few eyebrows.
"Ferrari is capable of being a fully-fledged luxury brand,"
Marchionne declared last month, setting his stall out to target the
kind of high-end valuation multiples enjoyed by the likes of LVMH
and Richemont.
The 62-year-old said Ferrari is worth up to 10 billion euros ($11.3
billion), eyeing an initial public offering (IPO) slated for the
first half of this year and hoping for a chunky windfall to boost
FCA's own ambitious five-year investment plan.
But for all Ferrari's Formula One racing pedigree, exclusivity
exemplified by the LaFerrari supercar's 1 million euro price tag and
a production cap that maintains a healthy customer waiting list, the
company has its work cut out if it is to join a sector that trades
at about 20 times future earnings. That's more than double the
average for carmakers.
It has to be acknowledged that Ferrari is no laggard in the
money-making stakes, with profit nearly tripling over the past
decade and its margins of 14 percent unmatched by any carmaker bar
Porsche.
But those margins are well below Prada's 26 percent and have been
under pressure from rising costs.
Revenue growth has been more gentle than that of most European
luxury stocks and its capital expenditure and research and
development requirements are more than double, depressing its return
on capital.
SHORT ON DETAIL
While the multiples investors will pay depend on Ferrari's ability
to grow, it is hard to see what the company has beyond its cars that
would fit the luxury mold.
Ferrari has the capacity to raise annual production to 10,000
vehicles a year from 7,000, but Marchionne has made clear that
output will be kept below demand to protect the brand's exclusivity
and told analysts in a post-results conference call last month that
further detail on his strategy would not be forthcoming until nearer
the IPO.
Ferrari's merchandising division might seem an obvious starting
point, but Marchionne has denied this. In any case, the elevated
prices of T-shirts, bags and shoes bearing the prancing horse are
well below those commanded by luxury goods.
Its theme park in Abu Dhabi is also accessible to anyone willing to
fork out 250 dirham ($70) for a one-day pass.
"If you're already available to everyone, then making your way back
up to the luxury level is nearly impossible," said Manfred Abraham
at brand-building consultancy BrandCap.
"They would have to stop doing a lot of things and start again,
which is a massive investment ... how attractive is that to
shareholders?"
Investors have also been left scratching their heads over
Marchionne's statement that carmaking, which accounts for the bulk
of sales and profit, is "incidental" to Ferrari.
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As shown by Porsche Design, tire maker Pirelli's PZero and Bugatti's
move into apparel, previous attempts by automotive groups to stretch
beyond their core products have not provided a major revenue boost.
Then there's the Ferrari logo and colors, which analysts have said
make it a difficult sell in the fashion and design world.
LUXURY ALLIANCE?
There was talk of a luxury alliance with other opulent Italian
brands to rival conglomerates such as Kering <PRTP.PA>, but the
concept has been dismissed by two bankers close to the company.
Analysts, meanwhile, have pointed to the potential for exclusive
clubs and hotels for the super-rich or Ferrari moving into
high-value motorcycles and boats.
However, Bernstein analyst Max Warburton remains skeptical,
suggesting that the Ferrari brand could be extended at a luxury
premium only to watches, perfumes and eyewear.
"A sports car maker has little competitive advantage when it comes
to producing and selling personal luxury goods," he said.
Regardless of its prospects as a true luxury goods business, the
spinning off of Ferrari is far from a car crash.
The divorce will unlock the value of a business that made 12 percent
of FCA's profit last year. It could also pave the way for FCA to
attempt a tie-up with another carmaker, perhaps focusing on the
Asian market, bankers have said.
Yet how investors interpret Marchionne's bold statements remains
unclear, with analysts' estimates for Ferrari's worth ranging
anywhere between 5 billion euros and 10 billion euros.
"With luxury it's a lot about emotion and allure," one U.S.
investment banker said. "People may not fully buy into Marchionne's
argument, but they will put money on Ferrari on the promise of what
it represents and could be."
(Additional reporting by Ed Taylor in Frankfurt; Editing by David
Goodman)
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