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Nova School of Business and Economics

Corporate Valuation
Spring 2020 – T4
Ferrari Valuation Report

Teacher: Rosário André

Grader: Mariana Canta

Teacher: Rosário André

Grader: Mariana Canta

Group Members:
Corina Popa, 28918
Joana Reis, 40932
Margarida Gouveia, 29043
Nuno Street, 40955
Ferrari Valuation – T4

Agenda
1. Industry and company overview ..................................................................................................................3

2. Reformulation and past analysis ..................................................................................................................3

3. Sector Forecast.............................................................................................................................................3

4. Value Drivers ...............................................................................................................................................4

5. Financial Statements Forecast .....................................................................................................................5

6. Valuation: Betas, Costs of Capital and Terminal Growth ...........................................................................5

7. Valuation: Cash-flow Based Methods and Multiples Analysis ...................................................................6

8. Sensitivity Analysis .....................................................................................................................................7

9. Final Remarks and Recommendation ..........................................................................................................7

10. References..................................................................................................................................................8

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1. Industry and company overview

Listed as RACE on the NYSE and Borsa Italiana, Ferrari N.V. is an Italian brand focused on the production
of luxury performance sports cars, based in Maranello. In 1929, Enzo Ferrari set up the Scuderia Ferrari
Formula 1 competition team, and in 1939 founded Auto Avio Costruzioni’s where he built his first racing
car. During the ‘60s, Ferrari became a Limited Company and Fiat bought 50% of its shares. In 2015, FCA
(Fiat Chrysler Automobiles) put up 10% of its shares in Ferrari for sale in an IPO, becoming on that same
year publicly listed. Ferrari’s success is linked to its history of winnings in the Formula 1 championship. It
is considered one of the world’s most powerful brands.
The luxury industry comprises nine segments, both luxury goods and experiences. The industry is led by
luxury cars, luxury hospitality and personal luxury goods, which together account for more than 80% of the
total market. The luxury market in 2018 had an estimated size of €1.2 Tr globally, with positive performance
across most segments, with the sales of luxury cars dominating the market, growing at 5%. Ferrari competes
with brands such as Rolls-Royce, Lamborghini, Maserati, Bugatti, Aston Martin, Bentley and McLaren.

2. Reformulation and past analysis

With the objective of forecasting Ferrari’s cash flows, the consolidated annual financial statements for the
period between 2015 and 2019 were considered. In order to have an insightful perspective of the company’s
business, the financial statements were reformulated by separating the core, non-core and financing parts. It
was considered that regional segmentation was not relevant for Ferrari’s forecast since the company’s sales
are not dependent on market demand but on the target output set. The balance sheet was organized to output
Ferrari’s Invested Capital. Past analysis of relevant company’s ratios shows a stable liquidity position, with
an improving cash ratio. Regarding the company’s solvency, signs of over leverage in the beginning of the
period with improved levels towards the end are observed. The company’s cash conversion cycle is negative,
which reflects its competitive market position. Under the analyzed period, Ferrari has generated value from
the investments it makes, however, with a decreasing added value to its shareholders.

3. Sector Forecast
Ferrari operates in the luxury goods market, more specifically as an ultra-luxury automobile manufacturer.
The company’s target market consists of luxury performance cars with engines producing more than 500hp
and sold at retail prices in excess of €150,000. This niche market has historically followed the growth pattern
trend in the broader luxury market and is subject, to a certain extent, to global macroeconomic conditions
and overall consumer confidence. Demand is composed by high net-worth individuals (HNWI), who are
usually more resilient to economic downturns, and is heavily dependent on brand strength and new product
launches. The sector’s growth, not necessarily Ferrari’s, has been mostly driven by the APAC region in the
past. This trend is expected to continue at least until 2025.
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Although the number of HNWI and ultra-HNWI is expected to grow at a slower pace in the upcoming years,
Ferrari currently enjoys a loyal client base, with about 41% of clients being owners of more than one Ferrari.
Maintaining brand strength and exclusivity is key to sustain premium prices in this market. Moreover,
adapting to sector trends (e.g.: hybrid/electric cars) will be crucial for any luxury player in this market. All
things considered, ultra-luxury players like Ferrari will depend mostly on research and development to
support product launches in accordance to market demand.

4. Value Drivers
Revenues were firstly segmented in four categories: 1. Cars and spare parts, 2. Engines, 3. Sponsorship,
commercial and brand, and 4. Other. As a Luxury brand, Ferrari supplies a limited number of cars each year
to support brand exclusivity through excessive demand. Consequently, car revenues are mainly driven by
new models introduced in the market and the amount of shipments Ferrari is willing to allow each year,
instead of increases in geographical demand, for example. Production is constrained to 15.000 cars per year
and the company limits the production diversity to approximately 8 to 12 models a year. This means that
when new models are released, there are production cuts for some of the oldest in circulation. Therefore, we
have decided to split car sales revenue into model types (GT, Sports, Icona, Special Series) with their
respective sales per engine type (V12, V8). After calculating the average price per model type, with an
estimated premium of 10% due to customization features clients normally ask for, we considered Ferrari’s
own expansion plans towards the Icona and GT editions1. This approach seemed the most appropriate as
forecasting based on a percentage of historical revenues wouldn’t properly capture this strategic shift.
Ultimately, we have reflected Ferrari’s halt in production for 2020, following the Covid-19 pandemic, in the
number of shipments expected to be made this year (-10% YoY), which will most likely have a negative
impact on Ferrari’s revenue for the year.
The historical spare parts revenue was calculated as the difference between actual cars and spare parts
revenue minus our estimations of car sales revenue. The forecast was based on the historical percentage this
segment represented of car revenues (approximately 16%).
Regarding Engine sale revenues, we expect the negative trend to continue in the near future as the company’s
contract with Maserati is expected to expire and not be renovated in 2021/2022. Moreover, COVID-19 is
very likely to have sped up this process 2, leading us to estimate supply to be completely cut in 2021.
Sponsorship, commercial and brand revenues largely depend on Formula 1 and Ferrari events. This line of
revenue is expected to take a large hit as F1 is currently suspended until June at least and events have been
postponed without a due date. The future of sponsorship contracts for Ferrari is therefore uncertain and the

1 According to Ferrari’s 2018-2022 investment plan, Icona and the Special Series sales are expected to amount to 5% of total car sales, while
GT models are expected to increase from 36% to 40% of total sales.
2 Q1 results show a -44% decrease in this business line compared to 2019 Q1 results.

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brand might lose some momentum as they depend largely on the aforementioned factors for brand visibility.
As a result, revenues for this segment are expected to decrease sharply in the short-term (-60% in 2020), and
pick-up significantly once F1 returns to its normal schedule.
Ultimately, the last segment denominated as Other Revenues was forecasted as a % of car revenues. We’ve
applied a small penalty for 2020 due to the expected impact on the Mugello racetrack revenues, one of its
main sources of revenue.

5. Financial Statements Forecast

To arrive at Ferrari’s future cash flows, both the income statement and the balance sheet were forecasted in
order to gather the relevant inputs that ultimately lead us to the free cash flow (FCF). Starting with the
income statement, revenues were segmented into four blocks, which were forecasted using different methods
aforementioned. Each year’s cost captions were forecasted as a percentage of revenues, with slight
adjustments to reflect Ferrari’s efforts of becoming more cost efficient and plans to increase R&D, which
were assumed to only start in 2021 given the current Covid-19 environment. After applying the 24%
corporate tax rate, which is expected to remain constant, the core result is forecasted. Consequently, the non-
core and financing captions were forecasted to arrive at the total comprehensive income. Following the
turbulence associated with the Covid-19 in 2020 and the recovery in 2021, as we progress towards 2025,
Ferrari’s EBITDA margin tends towards the average of the luxury industry (29%). Lastly, the company’s
balance sheet was forecasted arriving at Ferrari’s expected future core and non-core invested capital, as well
as the net financial assets and equity (book) values.

6. Valuation: Betas, Costs of Capital and Terminal Growth

In order to compute Ferrari’s cost of capital, the first step was to find the unlevered industry beta, which was
calculated by deleveraging the firm’s peers’ adjusted betas and computing a weighted average. The peers’
raw betas were adjusted to account for their mean reverting property. The peers were selected from a range
of firms in the luxury and automotive industries, based on the profitability and growth criteria. The idea was
to consider the firms that are closest to Ferrari in terms of revenue growth and EBITDA margins. The same
peers were also considered for the relative valuation. The ECB Euro Area yield was used as the risk-free rate
and the MSCI World Index 10-year return as the market return. A 𝛽𝑢 of 0,90 was obtained, corresponding
to an unlevered cost of capital of 6,38%, estimated with CAPM. The yield on Ferrari’s longest maturity bond
(1,40%) was adjusted by the probability of default and the loss given default, in order to arrive at the cost of
debt (1,29%). Following that, by the Adjusted Present Value (APV) method can be employed, which delivers
as output the Levered EV and the Equity Value for each year. These values are considered for the
computation of Ferrari’s Weighted-Average-Cost-of-Capital (WACC) and Cost of Equity, necessary for the
other cash-flow based valuation methods.

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In what regards the value of the company’s expected cash flow beyond the explicit forecasted period, it was
assumed a perpetual growth of 3,92%. This is derived from the expected reinvestment rate and return on
new invested capital for the perpetuity’s first year. The RR stabilizes at approximately 20% as a result of the
expected decrease from 2025 to 2026 to be similar to the reinvestment decrease observed in the previous 4
years. In what regards the RONIC, it was assumed that it would stabilize at the observed rate in 2025.

7. Valuation: Cash-flow Based Methods and Multiples Analysis

To have a more complete and diversified analysis of Ferrari’s intrinsic value, four substantial valuation
methods were used: Adjusted Enterprise Value (APV), Discounted Free Cash Flow (DCF), Flow to Equity
(FTE), and Economic Value Added (EVA) method. Additionally, Multiples valuation was performed
considering the company’s selected peers.
In the Multiples Valuation method, distinct Price and Enterprise Value multiples were analyzed, namely,
P/Earnings, P/Sales, EV/EBITDA, EV/EBIT and EV/Sales. This approach yielded a share price range
between €77 and €184. This interval excludes sales multiples, as these tend to be quite volatile and do not
take into account expenses nor taxes, thus, not transmitting security to our valuation. Based on relative
valuation, the average share price obtained was around €103.
The first cash-flow based method was the APV, assuming, in this case, a target Debt/Enterprise Value
(D/EV) ratio. As the value of debt fluctuates with the company’s enterprise value, the interest tax shields
have the same risk as the operations of the firm, hence, the interest tax shield beta is equal to the unlevered
beta. Therefore, discounting the estimated unlevered FCF and the tax shield at the unlevered cost of capital,
leads to the levered EV. Following that, the Equity Value is computed by subtracting the fair value of
Financial Debt from the levered EV, reaching a total Equity Value of approximately €24 Bn, which
corresponds to a share price of €129,70.
Regarding the DCF method, which is a more specific version of the APV, we’ve computed the levered EV
by discounting the unlevered cash flows at the WACC. From this perspective, the WACC takes into account
all the possible returns, not only to shareholders, but also to debtholders. After the levered EV is computed,
the net debt value is subtracted to arrive to the projected equity, and subsequently, to a share price estimated
at €127,25.
The FTE was the third method used, which simplifies the share price result through the discount of the equity
cash flow projections at the equity cost of capital (levered), achieving a price per share of 129,70€. Finally,
the EVA method allowed us to compute the equity value by considering the NOPLAT and the invested
capital projected values for each year. This last method is based on the value creation principle, which
compares the ROIC against the opportunity cost (WACC), with the estimated value created by the company
in each period discounted at the WACC, reaching a share price of €128,00.

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8. Sensitivity Analysis
The sensitivity analysis was developed as we recognize the implicit calculation risk in each parameter
considered in the levered EV and share price determination. Three different tables were built in order to
assess possible different scenarios resulting from any change in a key input. First, we’ve analyzed our
terminal growth rate’s (g) sensitivity with respect to the retention rate (RR) and the return on new invested
capital (RONIC), both in perpetuity. For every 1% change in the assumed RR, ceteris paribus, the terminal
growth rate varies by 0,2%. Similarly, for every 1% change in the RONIC, the terminal growth rate also
varies by approximately 0,2%. Since the perpetual growth rate is computed as the product of these two
variables, it is not surprising that it responds equally to both, while keeping one constant.
Second, we considered our levered EV’s sensitivity to changes in both the terminal growth rate and the
unlevered cost of capital. This allowed us to have a better perception of the large impact a small change in g
can have: a deviation in g of approximately 1%, holding the unlevered cost of capital constant, may result in
fluctuations of almost €15 Bn in Ferrari’s levered value. This shows the tremendously elevated sensitivity
of the company’s valuation to the perpetuity growth rate. Conversely, by holding g constant and evaluating
a 1% deviation in the unlevered cost of capital, we obtain a nominal change in levered EV value of
approximately €7.2 Bn. Although both variables have different valuation impacts in terms of EV, they
highlight the high sensitivity our model has to these inputs.
Ultimately, we have translated the previous levered EV sensitivity analysis into their respective implicit
share prices. By doing so, we were able to have a better understanding of the magnitude of these changes in
inputs.

9. Final Remarks and Recommendation

Ferrari is recognized for its exclusivity and brand distinctiveness, hence, from a valuation standpoint, we did
not consider the multiple valuation to truly reflect its intrinsic value. Thus, based solely on cash-flow based
methods, as these allow us to reflect our view of Ferrari’s future performance, the different valuations yielded
a share price range between €127,25 and €129,70, with an average share price of €128,66. The different
methods yield very close results as the highest deviation is 1,92%, with differences resulting from model
imperfections. Based on the implied share price, Ferrari is found to be overvalued and the recommendation
would be to sell the stock. Yet, it is important to take into account that we are currently in highly volatile
and uncertain times. The present situation may be considered quite unprecedented as it cannot be directly
compared with a recession since it affects production, as the Maranello and Modena facilities have been
temporarily closed for security reasons, as well as the user experience (of purchasing the car), which is one
of Ferrari’s distinct features. Additionally, the future developments of Covid-19 made the forecasting quite
challenging as we considered a full recovery past 2020, hence, under an eventual re-emergence of the virus
scenario, the presented forecast would not be so appropriate.
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10. References
Bain and Company. (2019).” The Future of Luxury: A Look into Tomorrow to Understand Today”.
Accessed on May 1st, 2020. Available on: https://www.bain.com/insights/luxury-goods-worldwide-market-
study-fall-winter-2018/

Koller T., Goedhart M., Wessels D. (2015). “Valuation: Measuring And Managing The Value Of
Companies”. Wiley. Sixth Edition.

Ferrari Corporate. (2020). “2019 Annual Report”. Available on:

https://corporate.ferrari.com/en/annual-report-2019

Ferrari Corporate. (2019). “2018 Annual Report”. Available on:

https://corporate.ferrari.com/sites/ferrari15ipo/files/ar_2018_ferrari_nv_web_0.pdf

Business Wire. (2018). “Capgemini’s Asia-Pacific Wealth Report 2018: HNWI wealth in region is forecast
to surpass US$42 trillion by 2025”. Accessed on May 1st, 2020. Available on:
https://www.businesswire.com/news/home/20181127005876/en/Capgemini%E2%80%99s-Asia-Pacific-
Wealth-Report-2018-HNWI-wealth

Knight Frank. (2019). “The Wealth Report”. Accessed on May 1st, 2020. Available on:
content.knightfrank.com/resources/knightfrank.com/wealthreport/2019/the-wealth-report-2019.pdf

Ferrari Corporate. (2020). “Ferrari FY 2019 Results Presentation”. Accessed on May 1st, 2020. Available
on: https://corporate.ferrari.com/sites/ferrari15ipo/files/2020_02_04_-_ferrari_-
_fy_2019_results_presentation.pdf

Road and Track. (2019). “Ferrari Will Eventually Stop Building Engines for Maserati”. Accessed on May
1st, 2020. Available on:
https://www.roadandtrack.com/new-cars/future-cars/a27422320/ferrari-will-eventually-stop-building-
engines-for-maserati/

Ferrari Corporate. (2019). “Ferrari Company Presentation”. Accessed on May 1st, 2020. Available on:
https://corporate.ferrari.com/sites/ferrari15ipo/files/2019_05_-_company_presentation.pdf