Ferrari

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Video transcript

Ferrari is a quintessential Italian sports car manufacturer that offers a unique and sought-after product. We first invested in Ferrari in 2019, attracted to it by its inimitable brand strength and viable pricing power. It has earned a loyal customer base built on a strong franchise and many of its cars selling out before production even begins. Ferrari is well positioned to benefit over the next decade from the growth in high net worth population globally, especially the growth of the middle class in emerging markets.

Currently, the majority of Ferrari's revenue and profits come from the US and Europe. However, the company has also been increasingly present in emerging markets having expanded its China revenue with its successful launch of its Purosangue SUV. Ferrari's return profile is significantly different from its peers in the global autos sector.

They are more in line with the leading luxury goods companies with returns on invested capital in the mid to high 20s percent and our internal forecasts predict this to increase over the next few years. The high returns reflect the company's absolute focus on the high end luxury car market which is important to preserve brand value and superior pricing power.

The company operates a tight supply model that ensures exclusivity and scarcity. We estimate that the company is typically able to price its products at a premium of 25 to 75% above its closest competitors. Limited edition releases also highlight their ability to price at a significant premium to those deemed to be collectors' models.

The high demand, limited production runs and the loyalty of the customer base, what is called the Ferraristi, helps to boost ongoing demand. Greater use of the special service and Icona ultra high-end platforms gives them an ability to raise their average selling price which is already a sizeable premium to other luxury car manufacturers.

For example, the price of Ferrari cars has far outpaced inflation. The average selling price rising 85% between 2012 to 2024 compared to a 37% increase in US CPI over that period We believe the introduction of new Icona car, exclusive limited edition reissues of classic models, the so called Icona range should drive even higher average selling prices and a significant increase in margins and return on investment. Personalisation is also contributing to wider margins and enhanced profitability.

Ferrari's customers are typically willing to pay a 20% premium for options like different badge colours and special interiors. Over the years, Ferrari has also become more sophisticated in its approach to customer segmentation.

It targets models at a broad range of age demographics, aiming to recruit younger customers early whilst also aiming to achieve more geographic and gender diversity in its new client base. This marketing is helping to sustain the expansion of their order book. The company's ESG approach has been a focus of our engagement, particularly its carbon footprint and fossil fuel use. Petrol powered engines are central to the brand. However, our proprietary ESG risk analysis has highlighted potential regulatory risks.

This reflects the pressures Ferrari is facing in terms of tightening emission standards and the introduction of clear deadlines for the sale of new internal combustion engine cars in a growing number of markets. Ferrari aims to reduce emissions, and in 2020 the company launched its first hybrid model, the SF90 Stradale, which is currently the company's best selling model. They now have four hybrid models in the range and the first fully electric car is planned to be unveiled in 2025. Ferrari's management team has committed to a product lineup of 40% electric and 40% in hybrid models by 2030, with hybrids and electric vehicles being 60% of line up in 2026.

In terms of our outlook, Ferrari is well placed for growth within our megatrend thematic framework, notably the growth in high net worth individuals and the theme of vanity. We are confident in the long term growth trajectory of Ferrari.

It is well diversified customer base all around the world, high exposure to the US and to Europe, buoyant and resilient end-user market demand over the long term, and the ability to steadily increase its profit margins and return profile. It has long waiting lists for many of its models, making it actually less cyclical than what the market would expect in our view. One could argue that with demand for their cars far outstripping annual supply, the company has a more predictable outlook than many consumer cyclical companies.