Both Aston Martin & Ferrari reported their Q1 2021 results last week. Ferrari had an excellent quarter, even by pre Covid standards, and then was rewarded by a 10% drop in its stock price due to announcing that they were pushing back the 2022 financial goals by one year. Aston Martin also took a 10% hit to its stock price after reporting both a top and bottom line that beat analyst expectations (analysis of Aston Martin’s Q1: AML Q 1 2021) While the stock market can be quite irrational at times, there do seem to be quite sound reasons behind both reactions. Ferrari enjoys a rich market valuation and cannot afford a single misstep and the push back on the financial goals is certainly a bit of a stumble.
If you had been on another planet for the last 15 months, just woke up, and were given Ferrari’s Q1 2021 results to review, you would likely conclude they had a good quarter. The only things that would have raised an eyebrow are the Free Cash Flow and CAPEX numbers. While many of Ferraris rival ended up being pushed by COVID into the financial intensive care unit, Ferrari had a very mild case of the financial flu. However, a few of the actions they took to migrate their losses in 2020 do have longer term impact on the business. The most significant is the reduction in CAPEX which will result in the delay of a couple of new models in the next couple of years. While Ferrari indicated that their 2021 results will come in at the high end of the guidance range, they are now pushing the 2022 financial targets back one year to 2023.
The Ferrari earnings call was insightful as usual. While the last call was led by the CFO, Antonio Picca Piccon, this time the acting CEO, John Elkann, took on a much larger, and more active, role (former CEO Louis Camilleri retired suddenly in early December after catching Covid-19). Both did a nice job and handled the various questions tossed at them by the analysts quite comfortably. It’s clear they are on top of their business and clearly understand where the issues and concerns are likely to lie. The areas that I found interesting follow (note: in terms of the financial results, I am using Q1 2019 as the reference quarter as it gives a more balanced picture on the strength/weakness of the numbers):
Over the last several years, Europe received 46-48% of Ferrari’s production. This jumped up to 55% in 2020 and dropped just slight to 53% in Q1 2021. The prioritization of European deliveries vs. North America, which were down to 27% from a high of 32% in 2018, looks to be a deliberate move to maximize profitability as the Euro has been consistently strengthening against the dollar since 2019.
While there are a number of highly appealing aspects to the role, it’s also not one a lot of potential CEOs will want as its going to be a difficult one to win in. The new CEO is going to have to navigate a hugely disruptive shift from ICE to hybrid and EV, turn around a F1 Team that hasn’t won a world championship in 12 years, launch a SUV while not diluting the brand equity (or calling it an SUV), and do it all while continuing to drive the stock price. One major stumble with a big earnings miss and Ferrari risks becoming viewed as a struggling car company, and not a luxury goods company. Using Aston Martin as a reference, the difference between these two views is $47 billion. That’s the difference between the two companies’ market cap at last Friday close.
For Ferrari, a fully electric car is perhaps a bigger challenge than for any of its competitors given how sound is such an integral part of the Ferrari experience. Even though it’s only a quarter of the sales today, the symphonic 12 cylinder engine is still the heart of the Ferrari essence. The romantic image of crossing Europe at high speed behind the wheel of a Ferrari V12 has driven sales for decades. Doing it in a golf cart on steroids just doesn’t generate the same emotions. How you deliver sound & soul from a basically noiseless characterless powerplant without coming across as the world fastest, most expensive, boombox is a huge challenge.
In 2020 Ferrari spent €60 million in 2020 buying up land next to the existing factory in Maranello. This is most likely for future production expansion plans needed to support the upcoming EV & SUV launches. With COVID, construction would likely have been delayed which helps explain the shift in timing.
Ferrari is a highly successful company doing a great job navigating in a challenging environment. Right now, the stock price has been punished a bit for making what were exactly the right financial decisions back in 2020. Ferrari continues to execute well, and the only major change is on the timing of some of the new models. The most important decision the Ferrari Board of Directors will make this year will be on the appointment of a new CEO. While Ferrari clearly has a highly skilled executive team that has been able to carry the business during the transition, it will be the new CEOs job to lead Ferrari seamlessly through the transition to hybrids and EVs, launch the Purosangue SUV without diluting the Ferrari equity, and turn around the F1 Team. How smoothly that person does this will determine Ferrari’s long-term future.
Thoughts and comments? Please see the comments section below.
The sign up for new blog email notifications is at the bottom of the page.