Adam Jonas: Ferrari Is 'Uniquely Shielded' From The Disruption Facing Human Driving

• Ferrari NV RACE shares have lost 12 percent since October 22, remaining below $50 since November 16.
• Morgan Stanley’s Adam Jonas initiated coverage of the company with an Overweight rating and a price target of $56.
• Ferrari is not traditional transportation, and deserves a luxury goods valuation, while its business exhibits high margins, strong cash flow, and low cyclicality, Jonas said.

“From a fundamental and macroeconomic perspective, Ferrari controls its own destiny more than any other company under our coverage,” analyst Adam Jonas wrote. He believes that as long as the company continues to manufacture “attractive and pleasurable” vehicles in small quantities, it could continue to be profitable for a very long time.

Jonas explained that investors are not paying a premium for “untapped top-line growth potential,” rather for “a trophy asset with extraordinary scarcity and cash flow resiliency.”

The analyst cited four reasons for an investment in Ferrari:

1. Top-line growth prospects - Ferrari could gradually explore new growth paths, while continuing with its low volume strategy.
2. Profit resiliency and limited exposure to China - Ferrari exhibited extreme resiliency in profitability from 2007 through 2010. Moreover, the company is among the least exposed to China “where growth trends appear to be normalizing.”
3. Protected from secular disruption – “Ferrari is an exclusive club focused on driving sensation, not transportation. Unlike most co's under our coverage, we believe Ferrari is uniquely shielded from the growing secular disruption facing human driving and private ownership in the broader auto industry,” the Morgan Stanley report noted.
4. Deserves a luxury brand valuation – While Ferrari’s shares do trade at a high multiple, this valuation is justified given Ferrari's brand, growth and cash flow characteristics, which are “more attuned to luxury goods.”