Here's Why Ferrari Shares Are A Buy

Ferrari NV RACE combines the best features of the luxury goods industry and the auto industry and “is peerless,” Jefferies’ Philippe Houchois said in a report. He expects the company to “grow EPS at twice the pace of revenue” over the next five years, given “mix trends and latent operating leverage.”

Houchois initiated coverage of the company with a Buy rating and a price target of $74. He added, “We expect the next 12 months will bring clarity on what diversification means in terms of products and returns.”

Capital Intensity Misunderstood

There are continued concerns around Ferrari’s capital intensity, with R&D and capital expenditure constituting 26-27 percent of revenue. The analyst noted, “F1 R&D inflates the real cost of developing road cars, PP&E/sales is in line with peers and total capital employed well below as Ferrari benefits from structurally negative WC requirements and does not incur direct distribution costs.”

Related Link: Auto Show Announcements Put Ferrari On The Road To Upside Next Year

Houchois expects post-tax return on invested capital [ROIC] to exceed 70 percent in the near term.

A sustainable F1 business would result in improved financial performance, including that of Ferrari. F1 financial breakeven is estimated to add €7 to the share price.

While there are concerns around diversification, which would likely be dilutive to returns, but would still be accretive to value, the analyst mentioned.