Ferrari F40 Modificata
September 23, 2023
Ferrari’s Q 1 2023 Results: The Galloping Horse
Ferrari had a spectacular year in 2022 and that momentum has continued to build in 2023. Every single key financial indicator, bar one, grew double digits vs. Q 1 2022. The only hiccup, Free Cash Flow, was down by 9.9% but even there are good reasons for the decline which can be seen as a strong indication for more upcoming growth. The order book is very healthy, extending now into 2025, and Ferrari indicated that Q2 will be another strong quarter. Ferrari management then indulged in a bit of sand bagging and tried to downplay expectations for the back half of the year by indicating they expected Q4 to be the weakest quarter in 2023.
In Q3 2022, Ferrari raised its guidance on every single key metric and then went ahead and beat even the raised goals last year. I have no reason to believe they will not do the same this year and the Q1 results certainly point in that direction. To a certain extent, they have to given the current market cap of $54 billion and the stock sitting at an all-time high (as a reference Ford’s current market cap is $46.5 billion and they do sell a few more cars than Ferrari, another way to look at it is Ferrari is valued at $4.1 million for each car sold, while Ford has a value of $11k per car sold). Ferrari is valued by Wall Street as a super premium luxury company and not as a car company. The moment it fails to continue to execute brilliantly and beat expectations, Ferrari risks being seen more as a car company which will be ruinous for the stock price (as another reference, Aston Martin’s market cap is $1.9 billion or $296k per car sold). These dynamic plays themselves out both in the way Ferrari acts and the messages it is sending.
Benedetto Vigna has been the CEO for over a year and a half now and it shows. In the earnings call Vigna now comes across as more confident and in command. Vigna still holds his cards very close to his chest but is a bit more loquacious and comfortable providing deeper insights into certain areas while pushing back in others. The CFO, Antonio Picca Piccon, was also on the call and did his usual nice job of handling the various questions tossed his way. Vigna & Piccon appear to have a strong relationship and work well together.
The areas that I found interesting follow:
- Q1 2023 Key Results: The key numbers for Ferrari in Q1 2023 were 3,567 cars sold, (up 10% vs Q1 2022), Net Revenues of €1,429 million (+20%), and EBITDA of €537 million (+27%). Free Cash Flow is the one negative at €269 million, down -€30 million (-9.9%) vs. Q1 2022. The drop in the FCF delivery in Q1 2023 seems to be a result of a parts inventory build and lower incoming deposits vs prior year which benefited from the Daytona SP3 launch. Ferrari returned €102 million to its shareholders via both dividends and the share repurchase program in the quarter. Probably the most impressive number here is the value (revenue) growth which is 2x the unit volume growth. Ferrari’s ability to drive pricing and increase personalization bodes very well for its future and is a critical underpinning of its “luxury” brand positioning with the markets.
Over the last several years, Europe received 46-48% of Ferrari’s production. This rose to 54% in Q1 2022 but dropped back to 43% in Q1 2023 with a 12% decrease in deliveries. North American deliveries accounted for 27% of the total in Q1 2023, up 46% vs. Q 1 2022. Ferrari seems to quite deliberately adjust supply to take advantage of currency movements. As the US dollar has remained quite strong vs. the Euro going into 2023, the US has continued to receive a higher allocation of new cars. This is likely to change if the dollar weakens in the back half of the year. Supply in the US, even with a 46% increase in units, is still short of demand. As a result, residuals on recent models are still quite strong, even if they have receded a bit post the COVID used car bubble.
- Product Mix & Profitability: Ferrari’s Q1 2023 profits were €297 million up 24% vs. Q1 2022. Portfolio mix was a positive €85 million driven by range model mix and increased personalizations. Historically it’s been the big V12 GTs that have driven Ferrari’s profitability, now that’s been taken over by the hybrids. The SF90 & 296 ranges are highly profitable and as hybrids grow as a percentage of the overall mix, they will continue to drive margins up. When the first EV is delivered in 2025, I would expect that will give margins a further boost. With the Icona SP3 Daytona & Purosangue deliveries both ramping up in the balance of 2023, product mix should be quite positive going forward and help drive long term profitability.
- CAPEX, & Debt: Ferrari has very ambitious plans and is generating the cash needed to bring them to life as demonstrated by the €150 million in Q1 2023 CAPEX spending, up 14% vs. Q1 2022 with further increases planned throughout 2023. As per auto industry norms, Ferrari capitalizes around 50% of its CAPEX spending, with the balance hitting the P&L in the current year (unlike a certain other public Supercar manufacturer which capitalizes a much higher percentage which helps inflate EBITDA). I have no concerns with Ferrari’s current debt load. Total debt is down slightly to €2.7 billion, and cash and equivalents are up slightly to €1.44 billion with total liquidity of an impressive €2.1 billion. Ferrari does have €484 million of debt coming due in 2023 and has enough cash on hand today to retire all that debt plus a large chunk of the debt maturing through 2025. As a demonstration of the strength of Ferrari’s financial position, post the Q1 2023 close, Ferrari has returned an additional €350 million to its shareholders via both a large cash dividend and share repurchases.
- Portfolio: Ferrari’s current portfolio is by far the most complex in its history with still more to come this year. The strategy that’s delivered the current portfolio was first articulated back in Q3 2018. It was then that Ferrari changed the way it segmented its portfolio from V8s & V12s to Sport Range, Gran Turismo Range, Special Series, Icona, and Hypercar. This change in thinking gave Ferrari the license to build out its portfolio in a way it never had been able to in the past. Redefining the old V8 segment to Sports Range has allowed Ferrari to counter the threat from McLaren’s emergence in the past decade and while building a significant front engine V8 business that has served as the entry point into Ferrari ownership for a new generation of customers. Redefining the old V12 GT segment to Gran Turismo has given Ferrari the license to build out the GTC4Lusso & 812 lines while developing the Purosangue and drop both V8s and V12s into several of them (I am fairly certain the Purosangue will be offered with a V8 hybrid in the near furture) It has really put a fork in Aston Martin’s core front engine GT car business and Ferrari is now at least a generation or two ahead of Mr. Bond’s preferred purveyor of automobiles. I’m not sure Ferrari even still views them as a competitor. With the Icona, Ferrari has brilliantly created an avenue to leverage the nostalgia around its back catalog while spinning out an ongoing series of high margin multi-million dollar limited edition specials utilizing existing platforms (the SP3 Daytona is basically a La Ferrari minus the hybrid system). Ferrari stated that there would be 4 models launched in 2023. So far only the Roma Spider has been unveiled. In terms of the other three, I would expect to see a track focused/Speciale version of the SF90 in both coupe and convertible form plus perhaps a Purosangue T with a V8 hybrid.
- Hybrid & Electric Cars: While Ferrari remains committed to launching its 1st EV in 2025, what was interesting on the analyst call was the renewed focus on ICE with the advent of e-fuels. Post 2025, Ferrari seems very committed to offering three drive train options, ICE, hybrid, and EV. Per Mark Twain’s great line about “the reports of my death are greatly exaggerated”, the same applies to ICE, I expect it to be with us for at least the next several decades. It will now be interesting to see if Ferrari restarts development work on a next generation V12.
- Racing: Vigna has very open about the Formula 1 season starting with quite “mixed” results. After steadily improving over the last several years, the F1 team has taken a step backwards so far in 2023. With Charles Leclerc & Carlos Sainz, Ferrari has both an excellent pair of drivers who seem to work well together. Where Ferrari’s challenge lies in the team’s management. Ferrari is now on their 5thteam principal in the last decade, a rate of turnover matched only by the UK with its Prime Ministers. Vigna did ask for patience and to give the latest individual to sit in the Team Principle seat, Fred Vasseur, time to get things turned around.
Where Vigna seems to be more hopefully and excited is with the 499P, Ferraris new Le Mans Hypercar. The 499P was on the podium in each of its first three races and it should do well at Le Mans.
2023 Targets
The 2023 Targets remain unchanged for now. Given the strong Q 1 2023 results, none look overly ambitious. Given how Ferrari blew away its initial 2022 guidance, this feels a bit like another round of under promise and then over deliver. I would expect to see at least a few of the target revised upwards come Q3.
Risk
In a Bloomberg Interview in Feb 2023, Ferrari CEO, Benedetto Vigna was asked “What is the biggest threat you see for Ferrari?” His answer, “I can’t see any specific threat for Ferrari.” Complacency is Ferrari’s biggest risk. Ferrari’s vast market cap puts it in a position where it has no room for executional error while needing to drive its top line well ahead of any increases in volume. With Geely now looking like it will be in control of Aston Martin in the not-too-distant future, a rejuvenated and well funded Aston Martin could prove to be a formidable competitor in the front engine Gran Turismo & SuperSUV segments. Likewise, a resurgent McLaren led by Ferrari’s former Chief Technology Officer could be a serious threat again. Longer term, given the success of the T.50 & T.33 there is also a serious threat from Gordon Murray Automotive if it continues to expand its portfolio. Add GMA, with other emerging boutique manufacturers, SCG, Czinger, & Praga, and they could pull a few hundred high ticket sales a year out of Ferrari’s core. While Ferrari might have plenty of space in-between itself and nearest competitors right now, that gap can close quickly, especially as both Aston Martin & McLaren’s futures look more promising today than they did even a few weeks ago.
Summary
The Ferrari machine keeps going from strength to strength and Ferrari’s hefty $54 billion market cap reflects this. Vigna must lead Ferrari seamlessly through the transition to a three powertrain platform business with all the additional complexity that brings with it. Getting the F1 Team back to the very front of the grid doesn’t seem likely to happen anytime soon but the reality is, the F1 team performance only has a minor impact on Ferrari’s finances and none on car sales. In 2022, Ferrari beat their guidance on every single financial metric for the 2nd year in a row, now they just need to repeat this in 2023, which given the current model portfolio, momentum, and overflowing order book, they very likely will.
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It’s highly unlikely for GMA to become a competitor to Ferrari. Not only has Gordon himself said he doesn’t want to become a large manufacturer, Gordon himself is already 76. I doubt he has many years left to lead a major expansion of the firm. Christian von Koenigsegg however has discussed expansive growth plans and has already opened a new facility that can expand production to over 300 per year. And Koenigsegg is perhaps the only brand with the same cachet in the automotive industry as Ferrari.
Clarkson once commented on Ferrari’s F1 team only doing well when their road cars are terrible. Right now their road cars are excellent.
Purosangue is apparently only going to be a V12, or certainly at launch that is what was reported by several reviewers.
In today’s news, and it might just be early silly season in F1, it’s reported that Ferrari are about to make a massive offer for Lewis Hamilton. It’s a really interesting one on many different levels. Fred Vasseur has been a team boss for a long time, and from what I can tell the right experience to know what ideas to back and which to avoid. More developed as a racing team manager. Toto by contrast has been living on the coattails of what Ross Brawn had left behind after being ousted by the coup he and Lauda launched. The Mercedes board fell for it simply because they spoke German! Lewis moving to Ferrari would be a bet that Vasseur could get Ferrari back on top quicker than Toto at Mercedes, and Ferrari have been on the back foot for far longer!
There’s always talk of Verstappen moving to other teams, McLaren, Mercedes, Ferrari. But I also believe they’re all wary of him, from a sporting image of someone who doesn’t mind cheating to win, to one where they know he’s the crocodile that will bit off the hand that feeds it. If I were a team boss I’d rather have someone like Sainz who is brining home the points, or Norris who’s definitely underrated. If Ferrari did opt for Verstappen you’d have him running his mouth off after every race. You’d have his dad swearing and beating people up. You’d have his girlfriend telling you the language her dad used is just normal in Brasil and you shouldn’t pay any attention to former 3x world championship winner… Not one bit of which would ever help your image. Then you’d have to stop talking to certain members of the press or even entire companies that cover F1 because they reminded people of just how dirty and undeserved you were.
Aston as possible future competition? It’s interesting that Geely has taken up a larger shareholding, but also that Stroll’s YewTree consortium sold them those share, as well as diluting them further with new shares, and at a market premium. Plus that Geely had to drop nearly £100 million in cash on Aston too. Is this the mini rescue package because Reichman’s designs still don’t sell enough?
With Geely now seemingly going to take control of Aston, either by buying out Stroll or at the failure of Aston, it could be a genuine threat come the EV age. That’s where their technological excellence seems to lie.
I personally believe we should, globally, be investing in synthetic fuels and moving away from fossil fuels to them. They’re the only genuine net zero fuel out there. Germany might talk about EVs, but their electric production is between 25% and 33% coal. Added to the high cost, both monetary and emissions, to build an EV over ICE cars, their environmental credentials are highly questionable. Greenwashing. We really need governments to allow for synthetic fuels for one massive big advantage – all existing infrastructure can use them. Never mind that the developed world can’t afford EVs, the developing world certainly can’t. But switch the developed world to synthetic fuels, even if you’re only able to use a 50% mix, and suddenly you’re made a massive difference to global emissions. Roll that out globally, as you could, and then you really can make a difference to emissions, and by increasing the percentage of synthetic fuel in regular. Although they’re already racing with 100% synthetic fuels so the do work.
And with synthetic fuels we get to keep running some of the cars we love too.