Multiple Auto Analysts: Ferrari's Stock Could See Downside, May Not Find Growth

• Shares of Ferrari NV RACE were trading lower by 3 percent during Monday's session.
• Analysts at ISI Group and BNP Paribas both cautioned investors in separate notes on Monday.
• The analysts suggested that shares of Ferrari could see downside as the company's pricing power isn't as strong as some believe, and the company may struggle to find new venues of growth.

Shares of Ferrari haven't yet traded for a full month and is already priced below its IPO price of $52. On Monday, two auto analysts issued negative reports on the company which drove shares lower.

Evercore: Pricing Power ‘Not As Strong As Some Believe'

George Galliers, Evercore ISI's global automotive analyst, initiated coverage of Ferrari with a Sell rating and $40 price target, noting that the company's pricing power "is not as strong as some believe."

Galliers argued that Ferrari is not the most profitable scale automaker as Porsche has higher EBIT margins while (adjusted for revenues from Formula 1) Ferrari's gross margins are "only slightly better" than Porsche and Bentley. In fact, Ferrari has pricing power yet it doesn't take full advantage of its opportunity as pricing is in-line with the competition.

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Galliers also added that auctions involving post 1973-Ferrari vehicles have "fared worse" and are lower than those for Porsche.

Bottom line, while Ferrari may be a "legend" and maker of "many of the world's most desirable cars," this in itself is "insufficient to justify today's valuation."

Exane BNP: ‘No Easy Task' To Find New Sources Of Growth

Stuart Pearson, an automotive analyst at Exane BNP Paribas, initiated coverage of Ferrari with an Underperform rating with a base case valuation of $46 per share.

According to Pearson, Ferrari's luxury status has been successfully "proven" following its IPO, but the company must now find new sources of growth without introducing greater earnings cyclicality which is "no easy task."

Pearson said Ferrari's stock is trading at 13x 2015E EBITDA (17x adjusted for capitalised R&D) and at a 29x P/E. This implies that investors have "clearly" placed Ferrari in a "luxury realm with multiples that have little to do with the industrial world of car production." In fact, only Hermes commands a higher multiple than Ferrari and the automaker would need to deliver margins of 23 percent (versus 15 percent historically) and EBIT margins of 30 percent to justify "material upside" to today's share price.

Pearson added that in order to drive any "material upside," Ferrari would need to expand into new sources of growth, including higher personalisation, brand extension (i.e., to motorbikes), engine supply, and cost cuts in F1. The analyst stated that he is "most optimistic" on the potential for greater personalisation, but there is a "limited scope" in brand extension and F1.

Bottom line, Pearson is positive on Ferrari's earnings potential through 2019 (11 percent compounded annual growth in its earnings per share), but he sees "few positive catalysts" presenting themselves in 2016 to drive shares higher.