Ferrari: After a Fresh Look at Cost of Capital Assumption, We Raised Our Valuation 35% to EUR 256

After taking a fresh look at our weighted average aftertax cost of capital, or WACC, assumptions on wide-moat-rated Ferrari RACE, we now believe our 9% cost of equity assumption was too conservative. Our previous assumption was based on average systematic risk, in line with the rate of return investors expect of a diversified equity portfolio. This assumption served us well in the early goings, just after Ferrari was spun off from Fiat Chrysler in October 2015 and the stock traded into as much as the 5-star range in 2016. With the exception of 2021, when the stock briefly reached 3-star territory due to the chip shortage, shares have traded in the 1-star range.

We now assume a 7.5% cost of equity based on below-average systematic risk, 1.5 percentage points below the rate of return investors expect of a diversified equity portfolio. We believe this better reflects Ferrari’s relatively low sensitivity to economic cycles, low operating leverage, and low financial leverage. Our cost of debt assumption remains 5.5% on low financial leverage, taking into account the spread creditors are likely to demand given Ferrari’s credit quality.

We assume a long-run effective tax rate of 23.5% based on the company’s historical results and the Netherlands’ statutory tax rate while weighting equity at 90% and debt at 10%. Our new assumptions lowered our WACC to 7.2% from 8.7%. We believe this better positions Ferrari’s WACC relative to BMW at 8.7%, Mercedes-Benz at 8.5%, and Porsche at 8.2%. While we are not averse to paying up for a wide-moat stock like Ferrari, the 2-star-rated shares currently trade at a 12% premium to our new EUR 256 fair value estimate.