As the Fed aggressively increases interest rates to battle rising inflation, and as economic uncertainties mount, many investors are browsing the markets for recession-proof stocks.
While this stock is in one of the last industries investors would typically look for recession-proof stocks, Ferrari (RACE -1.04%) has a number of qualities that make it a great option to consider as 2022 comes to an end.
Elevated exclusivity
A Ferrari price tag alone, which can easily top $300,000 and beyond, would be enough to offer exclusivity for its brand. But Ferrari vehicles are a rare breed and more difficult to own than many realize, and it's important for its operations to be this way.
Having the cash to buy a Ferrari is merely the beginning of the race, and potential buyers often have to meet criteria before being allowed to purchase a vehicle. You don't choose to buy a Ferrari; rather, Ferrari chooses whether it will allow you to buy. Sometimes a potential buyer will need to prove they owned a Ferrari in the past, and some dealers rarely sell to anyone under the age of 40.
And that process is just the tip of the iceberg for purchasing a standard Ferrari. It's even more difficult to purchase a limited edition. Here's why this exclusivity matters.
Ferrari keeps a lid on its annual sales to generate tremendous pricing and brand power that simply doesn't fade during economic downturns -- especially considering that its ultra-wealthy customers are hardly affected by economic uncertainty. Hand in hand with that pricing power, its exclusivity keeps demand consistently above supply, even during downturns.
Even in the face of economic uncertainty, rising interest rates, and industry chip shortages, Ferrari turned in a fantastic third quarter, with revenue, EBITDA, and EBIT growing double digits compared to the prior year.
Ferrari also boasted that in Q3, its outstanding order book recorded nearly all models sold out. In fact, Ferrari mentions its backlog of orders every conference call, and over the past few years it has consistently checked in beyond 12 months.
Margin for error
Another massive differentiator for the ultra-luxury automaker is its margins, which simply defy the traditional automotive industry. Simply put, more of each dollar that its high-priced vehicles bring in goes to the bottom line.
RACE Operating Margin (Annual) data by YCharts
Ferrari trades at a premium valuation compared to traditional automakers simply because it produces margins similar to luxury goods stocks. For context, Ferrari trades at a 42 times price-to-earnings ratio, compared to Ford and General Motors at 6.5 times and 7 times, respectively.
Furthermore, when considering stocks to own during a recession, investors would be wise to glance at a company's cash cushion. You'll find in the graph below that Ferrari's business has driven its results consistently higher, enabling the company's balance sheet to remain solid through a global slowdown.
Racing to a brighter future
Ferrari has delivered a strong performance year to date and recently revised its 2022 guidance upward on all metrics -- and it's done this without even topping 10,000 unit sales through the first nine months of the year. Morgan Stanley's highly respected automotive analyst, Adam Jonas, noted: "Ferrari is as close to recession proof as it gets in our coverage."
Jonas is spot on. As it expands further into China's ultra-luxury market, and unleashes its first-ever "SUV," the Purosangue, it's not only nearly recession-proof -- Ferrari is driving toward an even brighter long-term future for investors.
