Strong Demand To Make Ferrari (NYSE:FRRI) ‘The IPO Of The Year’

Strong Demand To Make Ferrari (NYSE:FRRI) ‘The IPO Of The Year’

$FRRI, $FCAU, $VLKAY, $MSFT, $EBAY

First off, the luxury supercar maker is very profitable and worth buying into, and investors can get Ferrari shares by buying Fiat Chrsyler’s (NYSE:FCAU) shares prior to the Ferrari IPO.

The coming Ferrari IPO could not have come at a better time. But if you believe because the VW scandal and how it is affecting the auto industry that this may be a good opportunity to pick up some shares of the world’s most famous supercar maker at a bargain, you are wrong.

According to Ferrari Chairman Sergio Marchionne, Ferrari’s IPO remains on track to garner $11.2-B+ value that was targeted by the company long before the Volkswagen (OTCMKT:VLKAY) crisis rocked the auto industry, and initial demand might exceed 10X the available shares to be floated.

The Big Q: Why the strong interest in the IPO, and can Ferrari’s stock match the performance of its iconic supercars?

The Big A: Ferrari is the most hallowed names in the auto industry, and the World’s #1 brand. Fiat Chrysler owns a 90% chunk of the company, while the other 10% is owned by Piero Ferrari, son of the founder. Ferrari is a luxury car brand based on ultra-exclusivity, and its shares will be no different. Fiat is putting just 10% of the shares up for the IPO, while Fiat shareholders will get the other 80%.The IPO is expected to take place mid-October. The small float worth about $1.1-B promises to make trading volatile.

Note: Piero Ferrari is not selling his 10% stake (or any portion) in the company.

There is more

Fiat Chrysler operates a loyalty voting program which seeks to reward shareholders who are willing to hold their shares for at least 3 years. These special voting shares cannot be traded, and can only be transferred under special circumstances.

This loyalty reward program is designed to encourage a stable shareholder base, meaning that there is a strong incentive for Fiat shareholders to hold on to their Ferrari shares for at least 3 years following the IPO. This will limit trading in the shares even further since it will not only deter trading in 80% of Ferrari shares, but is also likely to reduce liquidity of the shares which might adversely affect share price.

I have not seen any SEC documents that can give valuable insights into the company’s financials,but it appears as if Ferrari is a very profitable carmaker. Ferrari finished Y 2014 with earnings of EUR 275-M on revenue of EUR 2.76-B, good for an EBIT margin of 14% and far ahead of the overall auto industry.

Growing those earnings is another matter.

Ferrari caps its sales in order to preserve exclusivity of its brand. The company sold only 7,255 cars in Y 2014. Compare that with 120,000 units sold by Porsche and 36,500 by Maserati over the same frame.

Another Big Q: How does Ferrari plan to grow revenue and earnings?

The Big A: The company has 2 Key growth strategies:

1. To increase sales slowly over a couple of years to 10,000 units, and
2. To introduce more ultra-luxury Limited Editions ultra-Supercars such as the $1.4-M “LaFerrari.” Ferrari’s F12 Berlinetta starts at around $320,000 and it very possible that high demand and limited supply will give the company space to introduce a mid-range Ferraris, thinking the Dino, that is in development.
3. Ferrari can also grow significantly by boosting its license revenue. The company realized licensing revenue of EUR 109-M in Y 2014 from licensing deals with the likes of Microsoft (NASDAQ:MSFT), Lego, Puma, Oakley Sunglasses, as well as a host of valuable assets that carry the marquee name including Ferrari World Theme Park in Abu Dhabi, sportswear and watches. Last year licensing revenue contributed 17.6% to Ferrari’s top line up from 16.3% in Y 2013..

Buying Fiat Chrysler shares

The mystique surrounding the Ferrari brand is leading to strong demand for the shares, meaning that the average retail investor will have to pay a premium to the IPO price for the shares.

That being the case, the best route for long-term investors to take is to buy Fiat Chrysler shares prior to the Ferrari IPO to guarantee themselves Ferrari shares. Even with the expected loss in value for Fiat Chrysler shares, such a move is likely to yield a significant net gain even for short-term investors as was the case in the eBay/PayPal spinoff.

Stay tuned…

Paul Ebeling

HeffX-LTN

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