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TB0459

Michael H. Moffett

Ferrari: Valuing The Prancing Horse

While we will continue to pursue a low volume production strategy and maintain our reputation
for exclusivity, we intend to respond to growing demand, both in emerging markets as well as in
response to demographic changes and the growth in the size and spending capacity of our target
clients. We believe we can grow in a controlled manner while preserving the exclusivity of our
brand by continuing to focus on distinct market segments and maintaining a strong pipeline of
new car launches.
– New Business Netherlands N.V., Form F-1, U.S. Securities
and Exchange Commission, Ferrari Prospectus, p. 79.

Project Owl—the code name for the initial public offering (IPO) of Ferrari—was
over. Officially, in all of the documents filed with authorities like the U.S.
Securities and Exchange Commission, the company had been called New Business
Netherlands N.V., now to be renamed Ferrari N.V. The prancing horse had
opened at the top end of its target price range—$52 per share in the U.S.—
raising nearly $1 billion for Ferrari’s owner, Fiat. Like most IPOs, the share price
of RACE (the ticker symbol for Ferrari) settled in the weeks following the
launch. But now many analysts and mutual fund managers were all asking the
same thing: Was Ferrari a promising equity or simply another of the equity eye
candy IPOs to hit the market in recent years?

The Ferrari Legacy

If you can dream it, you can do it.
– Enzo Ferrari
Ferrari was the namesake of Enzo Ferrari. An automotive engineer his entire life, Enzo worked with Alfa
Romeo for many years, performing every possible function including lathe instructor, test driver, racing
driver, and eventually, serving as the director of the Alfa Corse racing division.

In 1929, Enzo founded Scuderia Ferrari in Modena, Italy. Scuderia was a racing stable, where
owners could drive and compete with their own cars. Enzo left Alfa Romeo in 1939 to open his own firm,
Avio Costruzioni on Viale Trento Tieste in Modena (the plant was eventually moved to Maranello). After
the forced hiatus during the Second World War, Ferrari launched the 125 S in 1947, and on May 25, 1947,
the Ferrari 125 S won its first race, the Rome Grand Prix. Ferrari has since won more than 5,000 races
worldwide.
The financial pressures of sustaining the growing high-powered Ferrari family of cars resulted in
Enzo partnering with the Fiat Group in 1969; Fiat initially taking a 50% interest, then increasing it to 90%
in 1988. Enzo’s remaining 10% ownership was passed to his son in that same year with his death. It was
now the Fiat Group and its family interests that sustained Enzo Ferrari’s legacy. That legacy was now led
by Fiat’s new CEO, Sergio Marchionne.

Core Characteristics
Ferrari believed it possessed a number of core pillars, characteristics that formed the foundations of its
value and value-growth potential.1
• An iconic brand with superior, enduring power, benefiting from a loyal customer base.
• Global access to growing wealth creation.
1
New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, Ferrari Prospectus, p. 24.
Copyright © 2016 Thunderbird School of Global Management, a unit of the Arizona State University Knowledge
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of Global Management from Mar 2021 to Apr 2021.
 For the exclusive use of M. Alyami,
2021.
Enterprise. This case was written by Professor Michael H. Moffett with the research assistance of Jeeku Saha, MBA ’16,
for the sole purpose of providing material for class discussion. It is not intended to illustrate either effective or ineffective
handling of a managerial situation. Any reproduction, in any form, of the material in this case is prohibited unless
permission is obtained from the copyright holder.

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 • Exceptional pricing power and value resilience.
• Racing heritage.
• Leading-edge engineering capabilities.
• Flexible and efficient development and production process.
• Strong and resilient financial performance and profile.
• Superior talent.

And in the end, leadership at Ferrari intended to achieve profitable growth by pursuing, in its own
words—
controlled growth in developed and emerging markets.

Powerful Brand
Ferrari is the world’s most powerful brand. The legendary Italian carmaker scores highly on a
wide variety of measures on Brand Finance’s Brand Strength Index, from desirability, loyalty, and
consumer sentiment to visual identity, online presence and employee satisfaction. Ferrari is one of
only eleven brands (including Google, Hermès, Coca-Cola, Disney, Rolex, and F1 racing rivals
Red Bull) to be awarded an AAA+ brand rating and has the highest overall score.
Though Ferrari is the world’s most powerful brand, being a niche, luxury brand with an
officially capped production, it is perhaps unsurprising that it is some way off being the world’s
most valuable. Its US$4 billion brand value puts it 350th in brand value terms. David Haigh
continues, “Apple also has a powerful brand, rated AAA by Brand Finance. However, what sets it
apart is its ability to monetize that brand.”2

Ferrari’s brand—powerful, yet not one of the most valuable—was part of its enigma. Management at
Ferrari saw this as a true market differentiator. Shares in Ferrari would not be valued in the marketplace
like traditional automotive shares, but rather as shares in a powerful, sustainable, luxury good. But as
Brand Finance noted, a powerful brand was not the same thing as a valuable brand. Markets would decide
that.

Limits to Growth
We pursue a low-volume production strategy in order to maintain a reputation of exclusivity and
scarcity among purchasers of our cars and deliberately monitor and maintain our production
volumes and delivery wait-times to promote this reputation.
– New Business Netherlands N.V., Form F-1, U.S. Securities
and Exchange Commission, p. 22.

Like other rare elements, Ferrari’s value was linked to its scarcity. As illustrated in Exhibit 1, Ferrari had
methodically controlled volume sales, averaging just 4.24% per year over the 1997-2014 period. Sales
growth had been even slower in recent years, even the post-2009 crisis period. Total sales volume in 2014
was 7,255 cars—an astonishingly small number by any automobile standard.

Scarcity premiums. In terms of preserving Ferrari’s value, this relative scarcity was both good news and bad
news. The good news was that leadership had clearly maintained the product’s relative scarcity in a global
economy that had grown faster and wealthier at a much more rapid rate. According to a recent study, the
number of high net-worth individuals (HNWIs) and their wealth, the target demographic segment for
Ferrari sales (at least historically), had grown 8.6% per annum for nearly 30 years.3

The countries driving Ferrari’s sales reflected that wealth creation. Sales volumes in 2014 were roughly
45% Europe/Middle East/Africa (EMEA), 35% the Americas, 11% Asia Pacific (APAC), and 9% Greater
China. This global sales mix seemed to be shifting slightly away from EMEA, with China and APAC
garnering the gains. (Global sales volumes are detailed in Appendix 4.) Diving deeper, four countries
made up 60% of this global HNWI population: the United States, Japan, Germany, and China.

2
http://brandfinance.com/news/ferrari—the-worlds-most-powerful-brand/.
3
Capgemini/RBC World Wealth Report, 2015. HNWIs are defined as an individual having investable assets of USD 1
million or more, excluding primary residence, collectibles, consumables, and consumer durables.
2 A06-16-0010
 For the exclusive use of M. Alyami,
2021.

Exhibit 1. Ferrari’s Sales Volumes

Source: New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, Ferrari Prospectus, p.31.

In its prospectus, Ferrari was quite bullish on HNWIs in China. Although China made up only 9% of
current sales, the growing wealth and taste for luxury goods in China was promising. China already made
up a very large piece of the total sales (2014) for a number of luxury goods producers: Hermes—25%;
LVMH—28%; and Prada—30%.4 If that were the case for Ferrari, the company could see growing
demand pressures. But there were skeptics, as a number of analysts worried that the Chinese economy
was already beginning to slow.

The bad news about this relative scarcity through slow growth was that 4% was not a promising
growth rate for an equity if sales and earnings did indeed follow volume growth rates. Publicly traded
shares generated income for investors two ways, through dividend yields and capital gains. But with no
plans to offer dividends, Ferrari’s value proposition relied exclusively on hoped-for capital gains. Investors in
equities typically demanded double-digit rates of return.

Differing perspectives on growth had also caused serious debate within Ferrari. Ferrari’s longtime
Chairman, Luca De Montezemolo, had left the firm suddenly in early 2015, reportedly over his opposition
to the IPO. Montezemolo believed the IPO would force the firm to grow sales volumes at a much more
rapid rate. (Montezemolo did receive a €15 million severance payment.) His resignation came only one
month prior to Fiat’s announcement of Ferrari’s IPO. Ferrari’s CEO, Sergio Marchionne, had repeatedly
stated publicly that Ferrari’s future was as a business, not art: There comes a point when exclusivity, if it
becomes unreachable, is no longer exclusivity, it’s like you’re reading a fiction novel…let’s not fool ourselves, we
are in the business of selling cars to people.

Regulatory limits. There was an even more challenging limit to future growth: European Union (EU) and
U.S. government emission and mileage limitations. Ferrari was classified by the EU as a small volume
manufacturer (SVM), and therefore subject to much less stringent emission requirements. The EU has,
however, been revising these restrictions for the 2017-2021 period, and continued risks and threats to
Ferrari persist. Ferrari will be submitting its emissions plan for the 2017-2021 period in the coming year.

Under current U.S. law, as long as an automobile manufacturer sold fewer than 10,000 units globally
per year, it was not subject to U.S. gasoline mileage targets and restrictions. If Ferrari broke that 10,000
unit barrier,

4
“The Ferrari Bond: Initiate Overweight at $56 PT,” Morgan Stanley, December 7, 2015, p. 9. Morgan Stanley also
noted that although China was important for many luxury goods makers, Ferrari had a relatively low level of
exposure to the Chinese market at this time.

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A06-16-0010 3

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 For the exclusive use of M. Alyami,
2021.

however, the car could not be sold in the U.S. market without the company altering its product mix to
reach fleet mileage targets. That would mean launching models with smaller engines and better mileage.

In its prospectus, Ferrari noted that it had petitioned the EPA for alternative standards for the 2017-
2019 period, and would thereafter apply to the National Highway Traffic Safety Administration (NHTSA)
for company- specific standards under the combined average fuel economy (CAFÉ) clause. In both cases,
Ferrari noted that it expected “to benefit from a derogation from currently applicable standards.”5 In
addition, it was rumored that development of an electrically powered version was underway, which would aid
in meeting fleet targets. Porsche, for example, had just announced a purely electrically powered model.

Financial Performance
Ferrari’s financial results, summarized for the 2012-2014 period in Exhibit 2, revealed several unique
features. First, the company had a relatively small product portfolio, consisting of eight vehicles that
accounted for 70% of total revenue. Its sales and rentals of engines was exclusively to Maserati (it had
supplied engines to Maserati since 2003), and its other sponsorship income was tied to Formula 1 racing.

Exhibit 2. Results of Operations (for the years ending December 31)

Percentage Percentage Percentage
of of of
Millions of euros 2012 net 2013 net 2014 net
revenues revenues revenues
Cars and spare parts € 1,695 76.2% € 1,655 70.9% € 1,944 70.4%
Enginescommercial and brand
Sponsorship, 77 3.5% 188 8.1% 311 11.3%
385 17.3% 412 17.6% 417 15.1%

Other 68 3.1% 80 3.4% 90 3.3%

Total net revenues € 2,225 100.0% € 2,335 100.0% € 2,762 100.0%

Net revenues 2,225 100.0% 2,335 100.0% 2,762 100.0%

Cost of sales (1,199) -53.9% (1,235) -52.9% (1,506) -54.5%
Selling, general and (243) -10.9% (260) -11.1% (300) -10.9%
administrative
Research and development (431) -19.4% (479) -20.5% (541) -19.6%
Other expenses, net (17) -0.8% 3 0.1% (26) -0.9%
EBIT € 335 15.1% € 364 15.6% € 389 14.1%
Net financial income (expenses) (1) 0.0% 2 0.1% 9 0.3%
Profit before taxes 334 15.0% 366 15.7% 398 14.4%
Income tax expenses (101) -4.5% (120) -5.1% (133) -4.8%
Net profit
Source: € 233
Form F-1 Registration Statement, New Business10.5% € 246
Netherlands N.V., p.52 10.5% € 265 9.6%

Yet, Ferrari’s R&D expenses were exceedingly high compared to any other automobile
manufacturer, as illustrated by Exhibit 3.6 Where R&D expenses as a percentage of sales averaged less
than 5% for most of the global industry, Ferrari’s were over 20%. Porsche, a distant second, was only
11%.7

Ferrari’s premium pricing and minimalist cost structure resulted in a gross margin that was more like a
Silicon Valley internet firm than an automobile manufacturer. As illustrated in Exhibit 4, Ferrari’s gross
margin—net revenues less direct costs—was 45.5% in 2014, more than double that of any other major
automobile company. That large gross margin in turn generated an extremely large operating margin
(EBIT as a percentage of sales) of 14.1%, again the highest in the industry.

The spread between the two margins, gross less operating, was—at 31%--delivering financial results
far beyond an automaker. That same spread averaged only 12% amongst a peer group of luxury
automobile
5
New Business Netherlands N.V., Form F-1, U.S. Securities and Exchange Commission, Ferrari Prospectus, p. 43.
6
Note that Exhibit 3 includes R&D expenses as occurring on the income statement as well as other R&D
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of Global Management from Mar 2021 to Apr 2021.
 For the exclusive use of M. Alyami,
2021.
expenditures that are capitalized, and therefore run through the cash flow statement as opposed to income.
7
“Ferrari IPO: Why This Engine Runs Too Rich,” by Abheek Bhattacharya, The Wall Street Journal, October 20,
2015.

4 A06-16-0010

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manufacturers, and was twice that of other major players.8 This despite the fact Ferrari was dwarfed by the
others in terms of size in vehicles sold, employees, revenues, or even total profits.
Exhibit 3. R&D Expenditures as a Percentage of Revenue

Source: The Wall Street Journal and company reports. Expenditures includes R&D expenses and capitalized expenditures.

The growing debate was whether Ferrari could maintain those margins over the next five to seven
years as it continued to grow volume sales. Some analysts argued that as volume sales grew, R&D
expenses as a percentage of revenues would not grow as fast, as the company enjoyed scale benefits of
previous investment. That, if true, would translate into a growing operating margin for the company.
Other analysts, however, argued that the company would struggle to maintain its current investment and
expense structure as it worked hard to maintain its performance edge and brand value.

Exhibit 4. Comparison of Financial Margins of Selected Automotive Manufacturers, 2014

Millions of €, $, and ¥ Ferrari Volkswagen GM Toyota Ford Fiat Daimler BMW Audi

Revenues € 2,762 € 202,458 $155,929 ¥25,691,911 $135,782 € 96,090 € 129,872 € 80,401 € 53,787

Gross profits € 1,256 € 36,524 $17,847 ¥5,703,666 $12,266 € 12,944 € 28,184 € 17,005 € 9,372
Gross margin 45.5% 18.0% 11.4% 22.2% 9.0% 13.5% 21.7% 21.2% 17.4%

Operating profits € 389 € 12,697 $1,530 ¥2,292,112 $2,023 € 3,223 € 8,789 € 9,118 € 5,150
Operating margin 14.1% 6.3% 1.0% 8.9% 1.5% 3.4% 6.8% 11.3% 9.6%

Profit after tax € 265 € 11,068 $4,018 ¥1,823,119 $3,187 € 632 € 7,290 € 8,707 € 4,428
Net margin 9.6% 5.5% 2.6% 7.1% 2.3% 0.7% 5.6% 10.8% 8.2%

Gross Margin-Operating 31.4% 11.8% 10.5% 13.3% 7.5% 10.1% 14.9% 9.8% 7.8%
Margin
Vehicles 7,255 10,212,562 9,925,000 9,032,000 6,323,000 5,640,000 2,500,000 2,117,965 1,741,100
Employees 2,858 592,586 216,000 330,000 187,000 225,587 279,857 116,324 68,804
Vehicles/employee 2.5 17.2 45.9 27.4 33.8 25.0 8.9 18.2 25.3
Source: Calculations by author based on company annual reports.

The IPO
Ferrari’s IPO on Tuesday, October 20, 2015, was by all standards a huge success. Of the 189 million
shares authorized in Ferrari’s incorporation, 17.2 million (9.1%) were sold to the public. At a launch price
of $52 per share, Fiat raised $894.4 million. The over-subscription allowance raised another $28.6
million, bringing the total to $923 million.
8
“Ferrari Does Not Stand for ‘Fix It Again Tony’,” ADW Capital Management, LLC, August 2015, p. 8.
A06-16-0010 5
 One of the drawbacks associated with the IPO was that the capital raised was not targeted for
reinvestment into the business, as was common in many IPOs, but rather to compensate existing owners
(Fiat) for reducing their interest. For a company that believed in investing in technology, this was a loss.

Valuing Ferrari
There are two basic valuation methodologies applicable to Ferrari: discounted cash flow (DCF) and
valuation with comparables.

DCF Valuation
A baseline discounted cash flow (DCF) valuation of Ferrari is presented in Exhibit 5. Based on the
income items provided by Ferrari and previously presented in Exhibit 2, the DCF valuation is driven by
top-line growth. The analysis is based on a 10-year outlook, assuming 2015 as year 0.

Volume growth. Ferrari’s leadership team assured investors of slow volume growth, explicitly committing to
just under 9,000 units by 2019. That translated to an annual growth rate of 4.4% beginning with the 2015
volume of 7,500.

Price growth. Ferrari has provided some insight into the potential of automobile price growth, repeatedly
noting it was “committed to raising the average price point” of its products. Assuming that the scarcity
discipline towards volume growth is maintained, and attention is focused on maintaining a four-month
waiting period for orders, the baseline analysis assumes that price may grow 2% per year. It is possible,
however, that more aggressive annual price increases of 3% to 4% may be achievable.

Other revenues. Ferrari’s income from the sale of engines to Maserati, rental incomes, and sponsorship
associated with the brand are all expected to grow a moderate 3% per year. Formula 1 income, a small
component that leadership believes is critical to the brand, is only expected to grow 1% annually.

Cost of sales changes and gross margin. Ferrari purchases from a small set of suppliers working under
relatively long contracts. It employed 2,858 workers, and turnover was low. Labor costs and costs of sales
were expected to grow at 2.1% per annum in the baseline analysis.

SG&A and R&D expenses. This was in the eyes of many the second most critical valuation component
behind that of volume sales. If SG&A and R&D expenses both only grew at 2.0% and 2.5%, respectively,
per annum, reflecting what many analysts believed to be the company’s cost discipline and strategy moving
forward, Ferrari’s operating margin would indeed grow considerably over the 10-year forecast period.

Depreciation and capex. In its prospectus, Ferrari noted that there would likely be little additional
investment in plant and equipment necessary for expanding volume production in the coming years. The
company considered itself inherently agile, production increases were nominal in size, and sufficient
capacity existed.

At the same time, historical financial statements indicated continuing capital investments in both
PP&E and intangible assets (intellectual property and related engineering knowledge). Ferrari included
depreciation in its line item for research and development on its income statement (Appendix 1).
Depreciation expenses had totaled €120 million in 2013, €126 million in 2014, and were expected to total
€130 million in 2015. The DCF baseline analysis assumed no growth from 2015 levels in line with
management’s direction. However, many analysts believed capital investment has to grow, at least in line
with direct costs, if Ferrari is to maintain its technological edge. Capex and depreciation were assumed
equal in size in the valuation analysis.

Net working capital. Ferrari’s net working capital (NWC) was unusually long in duration due to its dealer
network financing program. Ferrari provided extremely low-cost loans to its dealerships (independently owned
businesses) to aid in their purchase of the automobiles for resale. The loans were typically secured by the
titles to the cars or other collateral. Total receivables, trade receivables for the cars themselves, and
receivables from financing activities, loans to the dealerships, had averaged 180 days of sales in 2014.
Ferrari’s hand-crafted manufacturing

6 A06-16-0010
mi in TGM
517
Glob
al
Acco
untin
g and
Finan
ce
A0
Mana 6- Exhibit 5. Discounted Cash Flow Valuation of Ferrari (Baseline Analysis)
geme 16-
Forecast periods 0 1 2 3 4 5 6 7 8 9 10
nt/Mo
ffett 00 Millions of Euros Assume 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
(SP2 10 Automobile sales:
1) Ferrari sales volume (units) 6,922 7,255 7,500 7,830 8,175 8,534 8,910 9,302 9,711 10,138 10,584 11,050 11,536
taugh
Sales volume growth 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%
t by
MICH Ferrari average sales price (€) € 239,093 € 267,953 € 273,312 € 278,778 € 284,354 € 290,041 € 295,842 € 301,759 € 307,794 € 313,950 € 320,229 € 326,633 € 333,166
AEL Sales price growth 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
MOF Car sales and spare parts € 1,655 € 1,944 € 2,050 € 2,183 € 2,324 € 2,475 € 2,636 € 2,807 € 2,989 € 3,183 € 3,389 € 3,609 € 3,843
FETT
, Revenues (millions of euros):
Thun Cars and spare parts € 1,655 € 1,944 € 2,050 € 2,183 € 2,324 € 2,475 € 2,636 € 2,807 € 2,989 € 3,183 € 3,389 € 3,609 € 3,843
derbir
Engine sales to Maserati and rentals 3.0% 188 311 320 330 339 350 360 371 382 394 405 418 430
d
Scho
Sponsorship, commercial and brand 3.0% 412 417 430 443 456 470 484 498 513 529 545 561 578
ol of Other Formula 1 and financial income 1.0% 80 90 91 92 93 94 95 96 97 98 99 100 101
Glob Total net revenues € 2,335 € 2,762 € 2,891 € 3,047 € 3,213 € 3,389 € 3,575 € 3,772 € 3,981 € 4,203 € 4,438 € 4,687 € 4,952
al
Mana Cost of sales (1,235) (1,506) (1,536) (1,568) (1,601) (1,635) (1,669) (1,704) (1,740) (1,777) (1,814) (1,852) (1,891)
geme 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
nt Gross margin € 1,100 € 1,256 € 1,355 € 1,479 € 1,612 € 1,754 € 1,906 € 2,068 € 2,241 € 2,426 € 2,624 € 2,836 € 3,061
from Gross margin (%) 47.1% 45.5% 46.9% 48.5% 50.2% 51.8% 53.3% 54.8% 56.3% 57.7% 59.1% 60.5% 61.8%
Mar
2021
Selling, general and administrative 2.0% (260) (300) (306) (312) (318) (325) (331) (338) (345) (351) (359) (366) (373)
F
to
Apr
2021.
Research and development
Other expenses, net
2.5%
2.0%
(479)
2
(541)
(26)
(522)
(27)
(535)
(28)
(548)
(28)
(562)
(29)
(576)
(29)
(591)
(30)
(605)
(30)
(620)
(31)
(636)
(32)
(652)
(32)
(668)
(33)
or
EBIT
EBIT margin (%)
€ 363
15.5%
€ 389
14.1%
€ 500
17.3%
€ 604
19.8%
€ 717
22.3%
€ 838
24.7%
€ 969
27.1%
€ 1,110
29.4%
€ 1,261
31.7%
€ 1,423
33.9%
€ 1,598
36.0%
€ 1,786
38.1%
€ 1,987
40.1%
th
Discounted Cash Flow Analysis
e
EBIT € 604 € 717 € 838 € 969 € 1,110 € 1,261 € 1,423 € 1,598 € 1,786 € 1,987
ex
Income tax expenses
Net operating cash flow after-tax
33.5% (202)
402
(240)
477
(281)
557
(325)
644
(372)
738
(422)
838
(477)
947
(535)
1,063
(598)
1,187
(666)
1,321
cl
Add back depreciation
Capex
2.0%
2.0%
130
(130)
133
(133)
135
(135)
138
(138)
141
(141)
144
(144)
146
(146)
149
(149)
152
(152)
155
(155)
us
Changes in net working capital*
Terminal value (& growth rate)
180/70/130
0.0%
(72)
-
(76)
-
(81)
-
(86)
-
(92)
-
(97)
-
(103)
-
(110)
-
(117)
-
(124)
13,784
iv
Free cash flows for discounting € 330 € 400 € 476 € 558 € 646 € 741 € 843 € 953 € 1,071 € 14,982 e
Cost of capital (WACC)
Present value of cash
8.6860%
€ 10,269
us
flows
Less market value of debt (510) Use Terminal Value? (0 no, 1 1
e
yes)
Equity value (millions of €) € 9,759 Terminal Value as % of
61%
of
NPV
Shares outstanding (millions) 189 $ per € M.
Value per € 51.64 which at 1.100 equals $56.80
7 share Al
Note: Changes in net working capital (NWC) estimated assuming 180 days for A/R, 70 days Inventory, and 130 days for A/P for the 2015 through 2025 period. ya
mi
,
 For the exclusive use of M. Alyami,
2021.

had averaged inventory levels of 72 days of cost of sales, and trade payables at 130 days of cost. The
baseline DCF analysis therefore assumed 180/70/130 days in A/R, inventory, and A/P going forward.

Terminal Value. Most valuations assume a business like Ferrari will continue to operate for many years.
Instead of building 50 or 100 years (columns) of cash flow calculations in a spreadsheet, most valuations
use a terminal value (TV) to approximate that continuing cash flow far into the future.

For calculation purposes, the TV in Exhibit 5 uses the typical perpetuity calculation form. In an attempt to
be conservative with the TV, net free cash flow (NFCF)—the sum of net operating cash flow after-tax plus
depreciation, capex, and changes in working capital—is assumed to grow at 0% for all years past 2025.
The TV for the baseline case, using the corporate cost of capital (discussed below) as the discount rate
and assuming a 0% perpetuity growth rate is €13,784 billion:

Note that despite using conservative assumptions, TV still makes up 61% of the total NPV.
Cost of Capital
The final component of the valuation was the calculation of a weighted average cost of capital (WACC) for
Ferrari. This was, of course, challenging given that the company was just now moving from being
privately held to being publicly traded.

Debt. Estimates were needed for two costs of debt, both euro-denominated.9 The first was the baseline
cost of debt in the European Union and euro-denominated markets, the 10-year German government bond
rate. This was considered the risk-free rate of interest in the euro markets (kRF ), and was currently at
4.000%. The second
cost of debt needed was for Ferrari itself (k D ). Although the firm had incurred little debt of its own to date,
European banks were quoting the company a rate of 6.000% (therefore, a 2.000% credit spread over the
risk-free
rate). With an effective tax rate of 33.5%, the after-tax cost of debt was 3.990%.

Equity. To estimate the cost of equity (ke ) using the capital asset pricing model (CAPM), assumptions
need to be made about the risk-free rate of interest (kRF ), the market risk premium (MRPm ), and Ferrari’s
beta (β). The cost of equity was then calculated as the risk-free rate plus a beta-adjusted market risk
premium:
Cost of equity = ke = kRF + β x MRPm

The risk-free rate was 4.000%, and the market risk premium (MRPm), the average spread of
expected returns on equities in Europe over and above the risk-free rate, was currently assumed to be
about 5.500%.

Estimating Ferrari’s beta (β) was in many ways guesswork with no real trading history. A company’s
beta was measured over time, statistically, as the covariance of the company’s return with that of the
market, divided by the variance of the market return. By definition, the beta of the market was 1.0. A firm
with returns that were relatively less volatile than the market might have a beta less than 1, typically
between 0.6 and 1.0. A firm demonstrating more volatile returns than the market may have a beta as high
as 1.8 or more. With no history, and no clear conclusion over whether Ferrari was an automaker or a
luxury good in the eyes of the market (at least yet), a conservative assumption was a beta of 0.9. The
resulting cost of equity was 8.950%.

Cost of equity = ke = 4.000% + (0.90 x 5.500%) = 8.950%

As illustrated in Exhibit 6, current estimates of the market cost of debt and equity were used to
calculate a weighed average cost of capital (WACC). Ferrari’s capital structure was largely equity, with
interest-bearing debt outstanding of €510 million, representing only 5.3% of its capital structure. Note that
this analysis calculates Ferrari’s equity value on its market value, meaning equity value is the company’s
This document is authorized for use only by Mohammed Alyami in TGM 517 Global Accounting and Finance Management/Moffett (SP21) taught by MICHAEL MOFFETT, Thunderbird School
of Global Management from Mar 2021 to Apr 2021.
 For the exclusive use of M. Alyami,
2021.
market capitalization, the share
9
Interest rates are currency-specific. Given that the valuation of Ferrari was to be made in euros, interest rates for
Ferrari’s debt would have to be euro-denominated as well.
8 A06-16-0010

This document is authorized for use only by Mohammed Alyami in TGM 517 Global Accounting and Finance Management/Moffett (SP21) taught by MICHAEL MOFFETT, Thunderbird School
of Global Management from Mar 2021 to Apr 2021.
price of €48 per share (market close on December 31, 2015) for the 189 million shares outstanding. The
WACC was calculated as 8.686%.

Exhibit 6. Ferrari’s Hypothetical Cost of Capital (in millions or percent)

Debt Value Equity Value Capital Structure Value Weight Cost Cost
Cost of debt 6.000% Risk-free rate 4.000% Debt value € 510 5.3% 3.990% 0.212%
Tax rate 33.500% Beta 0.90 Equity value * € 9,072 94.7% 8.950% 8.474%
Market risk 5.500% Enterprise value € 9,582 100.0%
premium
Cost of debt after-tax 3.990% Cost of equity 8.950% Weighted average cost of capital (WACC) 8.686%

* Uses share price of per (closing price 31, and 189 million shares outstanding.
€48 share December 2015)

Using the calculated WACC for Ferrari and its projected cash flows, the baseline DCF analysis in
Exhibit 5 estimated a present value of net operating cash flows of €10.269 billion. The present value of all
projected operating cash flow accruing to equity was €9.759 billion after netting the €510 million in
company debt. Given 189 million shares, this was a per share value of €51.64 ($56.80 at $1.10 per euro).
Further sensitivity and scenario analysis was obviously needed to provide more of a range and context for
the DCF valuation.

Valuation with Comparables

What is the most expensive stock in the world? If you asked a trader, his answer until Tuesday
would have been, without hesitation: Hermes. The luxury house trades at 34 times 2015 forecast
earnings. But yesterday, when luxury sports car maker Ferrari debuted as a rocket on Wall Street,
the answer would have been different. At $60 per share, a level hit at the opening, Ferrari is the
new queen of luxury: 35 times 2015 forecast earnings.
– “Mission Accomplished: Ferrari Debuts at Hermes Multiples,” Italy24, October 22, 2015.

A second valuation methodology widely used by investors and analysts was comparable multiples. A
comparable was any business or firm that would be considered a close competitor. A comparable
valuation multiple is any form of comparison across companies using a ratio or multiple of other financial
values. When valuing companies, this typically involves combining a market-based value measure, like
share price, with a financial statement value, like earnings or cash flow.

One of the challenges in using multiples is always what to conclude from the numbers. A firm
having a higher value than the average of the market or its industry could be reflecting the market’s
conclusion that the firm is in some way superior to the average, reflecting a price premium that may
persist. Alternatively, it might be that the higher value reflects a short-term mispricing of the firm’s shares
in the market, and if the market is rational and logical in its movements over time, the firm’s share price
should then return to near the average of the market in the near future, the so-called reversion to the
mean.

One of the most widely used multiples was the price-to-earnings ratio (PE), the ratio of an equity’s
current market price per share to the firm’s earnings per share. If the calculation used the company’s most
recently reported earnings, it was termed PE or trailing PE. Alternatively, if the PE was calculated using
some estimate of the firm’s future earnings, usually 12 months into the future, it was termed Forward PE.

Exhibit 7 provides a collection of price-based multiples for Ferrari in January 2016. These multiples
would seem to support Ferrari’s management argument that the company was, in the eyes of the marketplace,
valued more like a luxury good brand rather than a traditional automobile manufacturer. Although final
financial results for 2015 were not yet available, earnings were thought to be €1.58 per share. Consensus
estimates of 2016 earnings for Ferrari (future earnings) were approximately €1.69 per share.

A second multiple widely used in industry was the Enterprise Value (EV) to EBITDA multiple.
Enterprise value is the sum of the current market value of the company’s debt and equity less cash. Many
practitioners prefer the EV/EBITDA multiple over PE ratios because of the belief that PE ratios are
affected by company capital structures (and all capital structures are different), whereas EV/EBITDA is
not. The consensus forecast for Ferrari’s 2016 EBITDA was €800 million.
A06-16-0010 9
 Exhibit 7. Ferrari’s Market Value in Multiples
Auto Industry Luxury Industry
21 January 2016 Ferrari Daimler BMW Auto Hermes LVMH Luxury
Multiple (RACE) (DDAIF) (BAMXY) Industry (HESAY) (LVUMY) Industry S&P500
Price to Earnings 31.7 9.1 9.3 11.7 33.0 12.6 20.2 19.0
Price to Earnings Forward 18.8 7.4 8.4 --- 24.9 15.5 --- 17.2
Price to Book Value 3.1 1.4 1.3 1.4 9.4 3.1 3.1 2.7
Price to Sales 2.9 0.5 0.6 0.5 6.8 2.2 1.7 1.8
Price to Cash Flow 12.5 0.0 35.3 0.1 29.1 20.9 12.7 11.5
Dividend Yield 0.0% 3.7% 3.8% 2.3% 1.0% 2.3% 2.4% 3.0%

Price per share (USD) $41.94 $71.49 $28.80 --- $32.98 $31.09 --- ---
USD to = 1 EUR 1.0814
Price per share (EUR) € 38.78€ 66.11€ 26.63 ---€ 30.50€ 28.75 --- ---
Source: Data collected from Yahoo, Morningstar, JPMorgan, S&P, The Wall Street Journal.

If Ferrari was indeed more of a luxury good than an automaker, then its financial performance needs
to be evaluated in that comparable context. Exhibit 8 offers one such comparison. Here, Ferrari’s
EV/EBITDA multiple is compared to a multitude of European luxury goods sellers.

Exhibit 8. Ferrari’s EV/EBITDA vs. European Luxury Peers

Source: Ferrari NV: The Ferrari ‘Bond’, Initiate Overweight With $56 PT, Morgan Stanley Research, December 7, 2015, p.47.

Horse Trading
The expression horse trading has long meant that negotiating the price of anything—including a horse—
was complicated, as the determination of true value was very difficult. Ferrari had now been publicly
traded for more than 12 weeks, giving the market time to digest the IPO and form an opinion on the
company. But, as illustrated by Exhibit 9, Ferrari’s share price had largely slid since the IPO. Down nearly
30%, many analysts were coming to the conclusion that Ferrari had indeed been a one-trick pony—and
the market had seen the trick.

10 A06-16-0010
 Exhibit 9. Ferrari’s Share Price Since IPO (NYSE: RACE)

Source: Constructed by author from closing shares prices for RACE as quoted by Yahoo.com

A06-16-0010 11
 Appendix 1. New Business Netherlands N.V. Consolidated Income Statement
For the years ended December 31,
(€ thousand) 2014 2013 2012

Net revenues 2,762,360 2,335,270 2,225,207

Cost of sales 1,505,889 1,234,643 1,198,901
Selling, general and administrative costs 300,090 259,880 242,819
Research and development costs 540,833 479,294 431,456
Other expenses/(income), net 26,080 -2,096 16,534
EBIT 389,468 363,549 335,497

Net financial income/(expenses) 8,765 2,851 -898

Profit before taxes 398,233 366,400 334,599

Income tax expense 133,218 120,301 101,109

Net profit 265,015 246,099 233,490

Net profit attributable to:

Owners of the parent 261,371 240,774 225,403
Noncontrolling interests 3,644 5,325 8,087

Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.373.

12 A06-16-0010
Appendix 2. New Business Netherlands N.V. Consolidated Statement of Financial Position
At December 31,
(€ thousand)20142013

Assets
Goodwill 787,178 787,178
Intangible assets 265,262 242,167
Property, plant and equipment 585,185 567,814
Investments and other financial assets 47,431 37,911
Deferred tax assets 111,716 41,543
Total nooncurent assets 1,796,772 1,676,613

Inventories 296,005 237,496

Trade receivable 183,642 205,925
Receivables from financing activities 1,224,446 862,764
Current tax receivable 3,016 1,297
Other current assets 52,052 39,163
Current financial assets 8,747 74,759
Deposits in FCA Group cash management pools 942,469 683,672
Cash and cash equivalents 134,278 113,786
Total current assets 2,844,655 2,218,862

Total assets 4,641,427 3,895,475

Equity and liabilities
Equity attributaable to owners of the parent 2,469,618 2,289,506
Noncontrolling interests 8,695 26,776
Total equity 2,478,313 2,316,282

Employee benefits 76,814 65,479

Provisions 134,774 103,785
Deferred tax liabilities 21,612 27,958
Debt 510,220 317,304
Other liabilities 670,378 470,325
Other financial liabilities 104,093 4,485
Trade payables 535,707 485,948
Current tax payables 109,516 103,909

Total equity and liabilities 4,641,427 3,895,475

Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.

377.
A06-16-0010 13
 Appendix 3. New Business Netherlands N.V. Consolidated Statement of Cash Flows
For the years ended December 31,
(€ thousand) 2014 2013 2012

Cash and cash equivalents at beginning of year 113,786 100,063 94,025

Cash flows from operating activities:

Profit before taxes 398,233 366,400 334,599
Amortization and depreciation 288,982 270,250 237,540
Provision accruals 66,274 24,095 41,932
Other non cash expense and income 53,348 31,818 37,007

Net gains on disposal of PP&E and intangible assets -742 -1259 -1166
Change in inventories -65,548 -19,549 -18,940
Change in trade receivables 824 -81386 8857
Change in trade payables 12,986 14,260 24,770
Change in receivables from financing activities -201,692 -56,531 -148,422
Change in other operating assets and liabilities 14,322 44,700 80,665
Income tax paid -140,920 -138,784 -134,322
Total 426,067 454,014 462,520

Cash flows used in investing activities:

Investments in property, plant and equipment -169,363 -161,653 -161,380
Investments in intangible assets -160,635 -109,250 -96,972
Cash acquired in change in scope of consolidation 38,751 0 0
Proceeds from the sale of PP&E 1,828 1,939 2,664
Change in investments and other financial assets -358 1,622 -1,960
Total -289,777 -267,342 -257,648

Cash flows used in financing activities:

Proceeds from bank borrowings 80,745 15,208 10,495
Repayment of bank borrowings -1,715 -10,010 -916
Net change in financial liabilities with the FCA Group 89,075 50,638 -292,588
Net change in other debt -27,638 8,189 22,877
Net change in deposits in FCA Group cash management pools -247,034 -227,495 72,887
Dividends paid to non-controlling interests -15,050 0 -7,148
Total -121,617 -163,470 -194,393

Translation exchange differences 5,819 -9,479 -4,441

Total change in cash and cash equivalents 20,492 13,723 6,038

Cash and cash equivalents at end of the year 134,278 113,786 100,063

Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.379.

14 A06-16-0010
 Appendix 4. Unit Sales by Geographic Region
Number of cars For the 3 months ending March 31 For the 12 months ending Dec 31
2015 % 2014 % 2014 % 2013 % 2012 %
EMEA
UK 210 12.84% 168 9.70% 705 9.72% 686 9.80% 686 9.26%
Germany 92 5.63% 163 9.41% 616 8.49% 659 9.41% 755 10.20%
Switzerland 72 4.40% 88 5.08% 332 4.58% 350 5.00% 366 4.94%
France 58 3.55% 68 3.93% 253 3.49% 273 3.90% 330 4.46%
Italy 51 3.12% 64 3.70% 243 3.35% 206 2.94% 318 4.29%
Middle East (1) 138 8.44% 150 8.66% 521 7.18% 472 6.74% 423 5.71%
Rest of EMEA (2) 144 8.81% 162 9.35% 604 8.33% 663 9.47% 825 11.14%
Total EMEA 765 46.79% 863 49.83% 3,274 45.13% 3,309 47.27% 3,703 50.01%

Americas(3) 515 31.50% 552 31.87% 2,462 33.94% 2,382 34.03% 2,208 29.82%
Greater China (4) 134 8.20% 111 6.41% 675 9.30% 572 8.17% 789 10.65%
Rest of APAC (5) 221 13.52% 206 11.89% 844 11.63% 737 10.53% 705 9.52%
Total 1,635 100.00% 1,732 100.00% 7,255 100.00% 7,000 100.00% 7,405 100.00%
Middle East includes the United Arab Emirates, Saudi Arabia, Bahrain, Lebanon, Qatar, Oman, and Kuwait.
Rest of EMEA includes Africa and the other European markets not separately identified.
Americas includes the United States of America, Canada, Mexico, the Caribbean, and Central and South America.
Greater China includes China, Hong Kong, and Taiwan.
Rest of APAC includes Japan, Australia, Singapore, Indonesia, and South Korea.

Source: Form F-1 Registration Statement, New Business Netherlands N.V., p.39.

A06-16-0010 15
16 A06-16-0010