Ferrari’s prancing horse is bucking the automobile trend

The mood music in the car sector is pretty melancholy right now because of Donald Trump’s trade wars and rising technology costs. But Ferrari is dancing to a different tune, thanks to its wealthy customers.

Revenues rose 9% in the third quarter of 2019 and operating profit jumped 12% year-on-year, the Italian manufacturer reported on Monday.

Ferrari’s patrons are still ordering new cars despite worries that a recession might be around the corner; many are happy to pay a premium to personalise their vehicle. Ferrari was confident enough to raise its cash flow and profit guidance for 2019. On both metrics it should accomplish this year what it had planned to achieve in 2020. It even announced a more convincing strategy to extend its brand beyond cars, an area where it’s fallen short.

The Italian company is making this look easy, but lifting sales while preserving exclusivity is a difficult balancing act in the luxury vehicles business; just look at the struggles of Aston Martin Lagonda Global Holdings. That company’s shares have dropped 66% this year while Ferrari’s have gained 77%, valuing the prancing horse at more than €28bn (about R456bn).

That’s more than its former parent Fiat Chrysler Automobiles (FCA), which sells as many cars in a day as Ferrari does in a year.

Investors would now have to fork out about 41 times estimated earnings to buy Ferrari stock, approaching the exalted 45 times multiple of handbag maker Hermès International. German premium car maker BMW trades on less than nine times earnings. While this is the very definition of a luxury problem for Ferrari, it still leaves very little room for error.

Luxury cars or luxury goods?

When Ferrari listed its shares in 2015, it implored investors not to think of it as a regular car maker but rather as a luxury goods company like Hermès. Much of that sales pitch made sense: Ferrari can charge plenty for its cars because customers expect them to hold their value or even increase. Its 25% operating profit margin is much higher than that of other car makers and should be more resilient. There are waiting lists for some models. Unlike much of the industry, Ferrari sales held up in the last recession.

Even so, it has to spend heavily on factory equipment and technology development (including for its struggling Formula 1 racing team). That will always be an impediment to matching Hermès’s operating profit margins, which exceed 35%.

The biggest beef with Ferrari’s luxury company aspirations was that its non-car branded products, many produced under licensing agreements, weren’t appealing. What’s the point of a $100 Ferrari polo shirt or $250 wristwatch? Not so long ago you could even buy a Ferrari surfboard. While Ferrari dithered over how to improve things, the brand suffered.

On November 4, the company sketched out a plan to slim down its clothing and accessories lines and move them upmarket with the assistance of Giorgio Armani. Meanwhile, it will open driving simulation centres and expand in e-sports to get young customers excited about the brand. Within a decade it hopes these products and services will contribute about 10% of operating profit. That’s still far from certain — brand diversification is notoriously difficult — but the success of the core business leaves room to manoeuvre.

Unlike peers such as Rolls-Royce Motor Cars and Volkswagen’s Lamborghini, Ferrari isn’t yet selling high-margin SUVs. The Italian car maker’s Purosangue isn’t slated to arrive for a couple more years. But judging by Ferrari’s profit and loss statement, its refreshed product line, including the single-seat Monza SP1 and 812 Superfast, is delivering.

Upcoming hybrid models such as the 1,000-horsepower SF90 Stradale supercar should increase confidence that Ferrari has the technical know-how for tougher emissions regulations.

Still, it’s surprising that the car maker seems in no hurry to build a fully electric car. Some caution is natural: an electric Ferrari won’t have the famous engine growl and some Ferrari purists are sceptical, management said on an investor call. Yet Porsche’s electric Taycan shows sportscar brands can deliver the same excitement with a much smaller carbon footprint. Ferrari proved sceptics wrong once before. It can do so again.

• Bryant is a Bloomberg Opinion columnist covering industrial companies. 

Bloomberg