At a time when many investors are shying away from automotive stocks amid the COVID-19 pandemic, as well as a plateauing North American new vehicle sales market, RBC Capital believes upside can be found with ultra-luxury automaker, Ferrari (NYSE:RACE). RBC Capital analyst Tom Narayan initiated coverage of the famous Italian automaker with an "outperform" rating and a price target of 200 euros.
Two key points are driving Narayan's upgrade. First, Ferrari's Purosangue SUV will open up the doors to not only a new demographic but also into the potentially lucrative Chinese luxury auto market. Second, the analyst believes Ferrari can produce 15,000 units annually, a significant increase from its current pace of roughly 10,000 units, at "little incremental cost." Historically, Ferrari has been known to limit the growth of its production, as it prefers to protect its exclusive image and the pricing power that comes with it, but as the company expands into China it can easily increase production for the growing market and keep its exclusivity in check.
Narayan isn't the only analyst putting out a positive note on Ferrari, as J.P. Morgan analyst Ryan Brinkman raised the firm's price target from $133 to $145 in June, noting that U.S. new vehicle sales and prices had been consistently recovering since the devastating plunge in March and April, when COVID-19 caused social distancing restrictions and job uncertainty. While the nature of Ferrari's ultra-luxury vehicles, and its ultra-wealthy audience, make the company more resilient during traditional economic downturns, it wasn't immune from the negative COVID-19 impacts. However, Ferrari has margins that stand out above traditional automakers, and it will continue to trade at a more premium valuation -- and the company will only become more valuable thanks to the Purosangue SUV and expansion into the Chinese market.