Ferrari will be far from the front of the queue when it comes to electric cars, but when it decides the time is right, it will be well placed to make the transition very successfully.
That’s the view of Zehrid Osmani, global equity fund manager at Martin Currie, one of a team of stockpickers working with Future Generation, an ASX-listed investor that backs local charities.
In fact, Osmani has been keen on Ferrari as an investment since it listed on the New York Stock Exchange in October 2015. When he arrived at Martin Currie, that fund also became an investor.
Mr Osmani said his investment strategy was simple. The team were long-term investors and had a very concentrated portfolio. And that meant a focus on quality growth.
Companies Mr Osmani’s funds are interested in have nine characteristics, he said. The first four are related to the industry. He likes to see high barriers to entry and companies with dominant market positions, strong pricing power and low risk of disruption.
The next four themes focus on the company – good structural growth prospects, high returns on invested capital, strong cashflows and balance sheets and good-quality management and culture. The ninth – “and most important”, he said – is an attractive valuation.
“In the market Ferrari operates in, the dynamics are terrible. It has low return on capital, companies regularly file for bankruptcy and it is very competitive,” he said.
But that’s if investors see Ferrari as an automotive company – when it is in the business of luxury.
“In the luxury industry, the dynamics are more supportive,” Mr Osmani said. “The pricing power of any company is critical during periods of high inflation.
“Ferrari operates on a tight supply-and-demand model which maintains exclusivity and scarcity, giving it superior pricing power.
“We estimate that the company is typically able to price its products at a 25 per cent to 75 per cent premium to the closest competitors in the high-end sports performance cars category.”
Since Ferrari floated, its shares have risen 297 per cent, closing at $US224.08 ($325.54) on Friday. Still, they have subsided about 12 per cent in the last year alone.
“The market has been favouring value stocks,” said Mr Osmani. “As long-term investors, it is nothing that concerns us. It is a reasonable performance in a market that has preferred value investing.”
In November, Ferrari raised its annual profit forecast even as rival Aston Martin downgraded its. At the time, Ferrari said pre-tax profits would be more than €1.73bn ($2.51bn). One in five of its cars were hybrid, the company said, and it intends to make almost half of its models entirely electric by 2030, with only 20 per cent having combustion engines.
Mr Osmani said Ferrari might be lagging the transition, “but when they make it, given their focus on R&D, given their superior innovation achieved through their Formula 1 focus, they will be able to make it very successfully”, he said. “In fact, one of their strongest-selling vehicles is the SF90 Stradale, a hybrid, and what the company has realised is that its clients do want a vehicle that is silent.”
Other new products could also provide opportunities. “The exciting development of the launch of Ferrari’s first SUV in 2022, the Purosangue, demonstrates the potential for greater growth in the Chinese market, where both luxury and comfort are in demand,” said Mr Osmani. “The limited-edition models also highlight Ferrari’s ability to price at a significant premium for models deemed to have collector status.”
