Ferrari's Profit Dropped Sharply on Coronavirus Effects, but There's Good News, Too

Ferrari (RACE -1.04%) narrowed its full-year earnings guidance after its second-quarter income fell 60% from a year ago, as expected, on declines in production and deliveries amid the COVID-19 pandemic.

But the company's stock rose after Ferrari's CEO said that its order book remains very strong, and that it's still on track for a solidly profitable year.

Coronavirus-related factory shutdowns have pushed back the start of production of Ferrari's new SF90 Stradale. Image source: Ferrari.

Why Ferrari's profit slumped in the second quarter

Ferrari's adjusted EBITDA -- or earnings before interest, tax, depreciation and amortization, "adjusted" to exclude one-time items -- fell 60% to 124 million euros. That was slightly ahead of the consensus forecast of Wall Street analysts polled by Thomson Reuters, who had expected adjusted EBITDA of 120 million euros on average.

As with so many other companies, Ferrari's earnings were hit hard by the effects of the coronavirus. Revenue fell 42% from a year ago, to 571 million euros, as the COVID-19 pandemic limited its production, its ability to deliver vehicles, and its revenue from racing and related activities. 

• Ferrari's shipments fell 48% from the second quarter of 2019 to just 1,389 vehicles. There were two coronavirus-related factors behind that drop: First, its two factories were closed for part of the quarter, limiting production; second, Ferrari had difficulty delivering vehicles to customers in countries where its dealerships were closed.  
• Revenue from "sponsorship, commercial and brand" activities dropped 37% to 83 million euros. Much of Ferrari's revenue in this segment is generated by its Formula 1 racing team, but this year's racing season, originally scheduled to begin in March, was suspended until early July amid the pandemic. (And the races that have been run so far have been put on with no fans present, reducing the series' revenue -- and Ferrari's share of it -- further.) 

Why Ferrari's outlook is still bright

Ferrari had warned that the second quarter could be rough, and I suspect that very few auto investors or analysts were surprised by the earnings decline. The good news is that there are reasons to think that the company will recover nicely over the next few quarters:

• Plenty of people are still ordering Ferraris. During Ferrari's earnings call, CEO Louis Camilleri told analysts that the company's order book was up by double-digit percentages from the same period in 2019. "Demand remains vibrant," he said.
• Ferrari's upcoming new models are delayed, but on track. The extended shutdown of Ferrari's factory delayed preparations to put its next new model, the SF90 Stradale, into production. Deliveries will commence in the fourth quarter, the company said, a bit later than expected. Other upcoming models remain on track, with minor delays. 
• Residual values remain strong. Used-Ferrari prices have stayed strong amid the pandemic, meaning that residual values -- the valuations used to determine lease pricing -- have held up well. 

Looking ahead: Ferrari's revised guidance for 2020

Ferrari didn't cut the updated full-year guidance that it provided in May. But it narrowed the ranges it gave earlier, generally toward the lower ends of the previous ranges. 

For 2020, Ferrari now expects:

• Revenue above 3.4 billion euros. (Prior guidance: Between 3.4 billion euros and 3.6 billion euros. 2019 result: 3.77 billion euros.) 
• Adjusted EBIT between 650 million euros and 700 million euros. (Prior guidance: Between 600 million euros and 800 million euros. 2019: 917 million euros.)
• Adjusted EBIT margin between 18.5% and 20%. (Prior guidance: Between 18% and 22%. 2019: 24.4%.)
• Adjusted earnings per share between 2.60 euros and 2.80 euros. (Prior guidance: Between 2.40 euros and 3.10 euros. 2019: 3.71 euros.) 

Ferrari also now expects its "industrial free cash flow" -- meaning cash flow related to its automaking business -- to come in between 100 million euros and 150 million euros, versus its earlier forecast of between 100 million and 200 million euros. It generated 675 million euros of industrial free cash flow in 2019.

The raw numbers

Data source: Ferrari. "Adjusted" figures exclude one-time items and are used here to facilitate comparisons with other periods; Ferrari took no one-time items in the second quarter of 2020. pp = percentage points.