Years ago, one of my coworkers quipped to me that the automotive industry was where capital went to die. To some degree, that's fair, as the industry is extremely competitive and capital intensive. To put it bluntly: Making high-quality vehicles to sell to the masses is difficult.
However, what if there is an automaker that not only boasts protection from economic downturns, it also offers luxury-like margins that most automakers dream of making? That's exactly the case with Ferrari (RACE -1.93%). These two graphs show precisely how the supercar manufacturer has left traditional automakers in the dust.
Ferrari's F8 Tributo. Image source: Ferrari.
When ratios are misleading
Before we show how exactly how and why Ferrari leaves automakers in the dust, let's first explain a misconception many investors have with Ferrari.
Stock screeners are very handy tools for investors to find and sort similar stocks, and one of the most common tools is the price-to-earnings ratio. However, at only a glance, this would show investors that Ferrari is trading at a much more expensive valuation compared to other automakers.
RACE PE Ratio data by YCharts
But not all ratio results are equal. In this case, despite all of these companies manufacturing and selling vehicles, Ferrari's vehicles, or more appropriately called supercars, command a much higher price tag, often multiple times higher than a mainstream vehicle. In fact, Ferrari's cheapest new vehicle would still cost you over $200,000.
These eye-popping prices are driven by factors like high quality, Ferrari's powerful brand image, and the extreme exclusivity that boasts demand far exceeding supply. The Italian automaker's extraordinary pricing power gives it a chance to take much more of each dollar earned to its bottom line, and that's something it does extremely well.
Ferrari margins race ahead
Ferrari has made a beautiful investment for many, as you can see, with a 256% gain since its 2015 initial public offering (IPO).
With its racing heritage, incredible pricing power, and lofty brand image, it's easy to imagine it produces better margins. But would you have expected it to the degree you see in this graph?
RACE Operating Margin (Annual) data by YCharts
Ferrari's incredible operating margins enable it to trade more like a luxury product manufacturer rather than a mainstream automaker -- and these valuations are justified. Further, mainstream automakers' margins have flatlined over the past decade, while Ferrari's are still trending up as it continues to drive its pricing power and improves operations.
It's even likely that as the company pushes more SUV sales -- a strategy that is new to the ultra-luxury carmaker -- these margins could continue to move higher.
Top of the podium
There are many reasons beyond Ferrari's juicy margins that make it a sought-after and intriguing automotive stock. The company recorded its largest number of vehicles sold in a single year in 2021. In addition to its growth into new markets, such as SUVs, the company also plans to have fully electric vehicles by mid-decade.
Also worth considering for investors is that Ferrari's sales are more recession-proof than traditional automakers, simply because the super-wealthy tend to keep buying cars regardless of the economic outlook.
Ferrari is an excellent option for automotive investors. One clear reason is that its operating margins have left traditional automakers in the dust -- and that's just the beginning of its investment thesis.
