Would You Buy Ferrari Stock At This Valuation?
Ferrari (RACE Stock Report) reported solid Q1 earnings, beating estimates. That’s despite the negative impact of COVID-19 felt across the automotive industry. So, should we buy RACE stock now? If you ask me, I have some reservations about buying shares of a company trading near all-time highs.
If even the super-wealthy are apparently hesitating for a bit, those of us who are laypeople have to be worried. Therefore, if you are concerned about buying shares of the luxury sports car maker, here are some heads up before you decide to buy the auto stock.
Profit Margins & Branding Power RACE Stock Through The Coronavirus Crisis
Ferrari proved remarkably resilient during the pandemic, as the company looks to be in a good position to weather the slowdown in the auto industry. That is because the Ferrari brand allows the company to maintain a high margin of 24% when most automakers’ margins are under 5%. Operating margin is a measure of profitability. It tells us how much of every dollar remains after subtracting the costs of goods sold and operating expenses.
With its iconic prancing horse symbol, one should not consider Ferrari as just another carmaker. It is perhaps more comparable to luxury brands as they target similar clientele. That explains the company’s ability to maintain a high margin. Of course, many investors are already well aware of this. They are therefore betting that Ferrari’s hefty prices will allow it to speed through these rough patches. It is not surprising then to suggest that this is one of the best auto stocks to buy now.
The group’s positioning, it’s more than solid order intake, capability in managing deliveries and waiting lists, and its structural strong commitment in prioritizing margins and [future cash flow] on revenues guarantees a higher resilience and better protection to the current challenging scenario,” writes Banca IMI research analyst Monico Bosio. She believes the stock could rise further, to nearly $182 per share.
Here’s What To Look Out For In Ferrari Stock
Ferrari’s sports car order book remains robust, despite some cancellations in the U.S. and Australia. It is not strong enough to offset the lost revenue from the company’s Formula One business and other segments.
The outlook for the second half of the year remains rough for the business, if not the larger world. Even when the economy fully reopens, the Formula One race may be run without spectators. This in turn reduces the revenue paid to Formula One teams.
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With some parts of Europe and the U.S. still in lockdown, Ferrari could face some potential supply chain disruption. This indirectly will affect the timeline of the shipments.
Engines Shipments, Sponsorship, Commercial and Brand In Jeopardy?
The Formula One season has yet to start. But the first 10 races have already either been postponed or canceled amid the coronavirus pandemic. The temporary suspension of Formula One racing also reduces store and museum visitors. Another hit to sales generated from its products. Furthermore, Formula One plans to set a lower budget cap for future F1 events, which could also impact the revenue for Ferrari.
Despite the significant drop in F1 revenues and production volumes in 2020, we believe this is temporary and things will return to normal for Ferrari after the pandemic is over. What truly matters now is for the company to be able to weather the storm without incurring huge losses. So far, Ferrari has been delivering exceptional results and the RACE stock price has tripled since it went public.
All in all, I like the fact that Ferrari was able to make an informed guess about its prospects for the remainder of the year. This sets them apart and makes it one of the stocks to watch in 2020.