Analysis & Insights on Ferrari’s 2022 Results

Ferrari had a spectacular year in 2022. Every single key financial indicator grew double digits vs. 2021. In Q3 2022, Ferrari raised its guidance on every single key metric and then went ahead and beat even the raised goals. With a broad and fresh product portfolio, they are poised to deliver outstanding growth in the years to come. Ferrari enjoys an overflowing order book and seems to be navigating the move to hybrids seamlessly. Ferrari’s 2022 results are a case study in what a highly competent management team, executing a clear strategy, that’s supported by wise forward thinking ownership looks like. Since the Q3 results were announced, Ferrari stock has been on an upward trajectory and is just off its all-time high. Today, Ferrari’s market cap is around $50 billion, putting it about on par with Ford, despite selling 0.7% as many cars (I guess the Ford GT didn’t do much for Ford’s market cap). The recent share price rise is even more impressive when you consider the overall turmoil in the stock markets these days and is a huge vote of confidence in Ferrari’s performance. The CEO transition to Benedetto Vigna has been flawless and Ferrari did a superior job navigating through the pandemic vs. all of its major competitors. I believe this is reflected in the transparency that Ferrari demonstrates when it presents the results.

Ferrari’s superior job of navigating through the pandemic has given it a highly advantaged competitive position moving forward. In the two main “volume” segments of Ferrari’s business, the Sports Range and Granturismo Range, and the Limited Edition segment, two of its main competitors, McLaren & Aston Martin, have fallen back considerably. In the Sports Range, McLaren has reduced production significantly and while its current range is still highly competitive, McLaren has struggled with the transition to hybrids. On the Granturismo side of the business, Ferrari is now so far ahead of Aston Martin, I’m not sure Ferrari even still views them as a competitor. On the Limited Edition Hypercars, McLaren has throttled back on production and while Aston Martin is still very actively collecting customer deposits for every idea they can come up with, production on AML’s flagship, the Valkyrie, has not exactly gone smoothly and its successor, the Valhalla appears to be mostly vaporware at this point.

The Ferrari earnings call was a lot less insightful than when John Elkann was the acting CEO and doing them. Elkann, as he is effectively Ferrari’s controlling shareholder, was always willing to provide a bit more color and insights into Ferrari’s longer-term strategy I believe will be the norm going forward as it is a reflection of the new CEO, Benedetto Vigna’s style. 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 comes across as a modest man who holds his cards very close to his chest. The areas that I found interesting follow:

2022 Key Results: The key numbers for Ferrari in 2022 were 13,221 cars sold, (up 19% vs 2021), Net Revenues of €5,095 million (+19%), and EBITDA of €1,773 million (+16%). Free Cash Flow set a new record at €758 million which is +18% vs. 2021 and +€83 million vs. the prior record set in 2019. The FCF delivery in 2022 really highlights the strength of the business and how it has rebounded since Covid. In 2022, Ferrari returned €649 million to its shareholders via both dividends and the share repurchase program. If I didn’t know any better, based on these results, I would suspect that Ferrari secretly discovered oil beneath the Maranello factory.

Over the last several years, Europe received 46-48% of Ferrari’s production. This rose to 49% in 2021 but dropped back to 45% in 2022 despite an 8.5% rise in deliveries. North American deliveries accounted for 26% in 2022, flat vs. 2021 but still up 22% in terms of actual units given Ferraris overall increase in production. Ferrari seems to quite deliberately adjust supply to take advantage of currency movements. As the US dollar remained quite strong vs. the Euro in 2022, the US received a higher allocation of new cars. Supply in the US, even with a 22% increase in units, is still short of demand. As a result, residuals on recent model are still very strong.

Product Mix & Profitability: Ferrari’s 2022 profits were €939 million up 12% vs. 2021. Portfolio mix was a negative €16 million driven by the Icona range Monza SP1 & SP2 phase out and partially offset by range model mix (812 GTS and the SF90 Stradale). Historically it’s been the big V12 GTs that have driven Ferrari’s profitability. This has now all changed with the introduction of the Icona range and 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, the timing of which Vigna reconfirmed on the analyst call, I would expect that will give margins a further boost. With the Icona SP3 Daytona & Purosangue SUV deliveries starting in 2023, product mix should be quite positive going forward and help drive long term profitability.

Cash Flow, CAPEX, & Debt: 2022 Industrial Free Cash Flow came in at €758 million. This is a €116 million improvement on 2021 number, and this is well ahead of the previous high of €675 million in 2019. If you are looking for a sign on whether Ferrari has fully recovered post Covid, this is it. Ferrari has very ambitious plans and is generating the cash needed to bring them to life as demonstrated by the €806 million in 2022 CAPEX spending, up 9% vs. 2021 with a further increase planned in 2023. As per auto industry norms, Ferrari only 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 don’t see any concerns with Ferrari’s current debt load. Total debt is up slightly to €2.8 billion and cash and equivalents are up slightly as well to €1.4 billion with total liquidity of €2.1 billion. Ferrari does have €905 million of debt coming due in 2023 and has enough cash on hand today to retire all that debt plus the debt maturing thru 2024.

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 it’s 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 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. 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. Other than stating that there will be 4 models launched in 2023, Ferrari has been quite tight lipped about what they are. However, I would expect to see a Roma Spider launched in the 1^st half of the year followed by the 812 Superfast replacement late in 2023. The other two models referenced will likely will include a track focused/Speciale version of the SF90 or F8.

Hybrid & Electric Cars: Back in Q3 2021 analysts call, Ferrari indicated that they will be launching the first fully electric Ferrari in 2025. Vigna has reconfirmed that this is on track. He has also stated that Ferrari would continue to produce internal combustions engines for as long as there was customer demand for them.

Racing & Stores: In 2022, total “brand”, which includes both racing, licensing and stores, was up by €28 million. The Formula 1 team has been steadily improving over the last several years. From a 6^thplace finish in 2020 to a 3^rd place in 2021, further improving to 2^nd place in 2022. With Charles Leclerc & Carlos Sainz, Ferrari has both an excellent pair of drivers and looks to be set for the next several years. Where Ferrari’s challenge lies in the team’s management. Ferrari is now on their 5^th team principal in the last decade after only having one in the 15 years prior. Given the last team principal had a similar grasp on strategy as did Lieutenant Colonel George Custer, the opportunity here for improvement is vast. In October 2022, Ferrari also revealed the 499P, the new Le Mans Hypercar with which Ferrari will enter the FIA WEC World Endurance Championship in 2023.

Other than Net Revenue, the 2023 targets do not look overly ambitious, given the start of the Purosangue & Daytona SP3 shipments. Given how Ferrari blew away its initial 2022 guidance, this feels a bit like another round of under promise and then over deliver.

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.” I think this is the biggest risk they have. A bit of paranoia might not be a bad thing. A decade ago, McLaren created a supercar business from scratch and Ferrari had to play catch up in terms of performance for years. While McLaren’s recent struggles are well documented, a resurgent McLaren lead by Ferrari’s former Chief Technology Officer could be a serious threat again. Longer term, a Geely controlled Aston Martin could also prove to be a formidable competitor in the SuperSUV and Gran Turismo segments. Given the success of the T.50 & T.33 there is also a potential threat from Gordon Murray Automotive if it continues to expand its portfolio. While Ferrari might have plenty of space in-between itself and nearest competitors right now, that gap can close quickly.

Summary

The Ferrari machine keeps going from strength to strength. It’s executed another CEO transition flawlessly and Ferrari’s hefty $49 billion market cap reflects this. Vigna must lead Ferrari seamlessly through the transition to hybrids and EVs while protecting the core legacy internal combustion business for as long as possible. Getting the F1 Team back to the front of the grid would just be icing on the cake. In 2022, Ferrari beat their guidance on every single financial metric for the 2^nd year in a row, now they just need to repeat this in 2023, which given the current model portfolio, bruised competition, and overflowing order book, they have a very good chance of doing so.