Image source: Ferrari
What: Fiat Chrysler Automobiles (FCAU) is set to sell 10% of subsidiary Ferrari in an initial public offering on Wednesday. The offering will be priced at $52, at the high end of the range anticipated in Ferrari's prospectus.
Ferrari N.V., a Netherlands holding company that will own 90% of Ferrari S.p.A., will be listed on the New York Stock Exchange under the ticker "RACE."
(Ferrari S.p.A. is the Ferrari company itself. The remaining 10% is held by Piero Ferrari, son of founder Enzo Ferrari. He isn't selling.)
So what: Ferrari's share price is likely to jump, at least at first. Bloomberg reported last week that the offering was "oversubscribed," meaning that demand for the shares greatly exceeded supply. With the shares available to the public consisting of just 10% of the company at first, supplies will be tight -- and demand for the shares is likely to be brisk.
That's likely to change over time, though, for a few reasons.
First, the supply of Ferrari shares in the market will increase greatly before long. Just one-ninth of Ferrari N.V. will be offered in the IPO, but the remainder will be distributed to FCA shareholders in a series of transactions over the next several months.
Second, while Ferrari is a tremendously valuable brand and a solidly profitable company, its growth prospects are limited. Ferrari limits its sales to around 7,000 vehicles per year in order to preserve exclusivity (and thus its pricing power). That number could increase somewhat over time, but it's unlikely to ever exceed 10,000 sales a year.
(One reason: As long as Ferrari's total worldwide sales stay below 10,000 a year, it's exempt from U.S. fuel-economy rules. Big powerful gasoline engines are at the heart of Ferrari's appeal, The company has no plans to change that any time soon, and adding a fuel-efficient small Ferrari just to meet regulatory requirements would likely damage the brand.)
Capping production makes all the sense in the world to Ferrari's business. But it means that the year-over-year growth that investors expect will be hard to come by. And that means that for all the luster of Ferrari's brand and all the romance of its fabled cars, its shares may not turn out to be a great investment.
That's especially true now that China's once-hot luxury market has slowed. China looked to be the best place for Ferrari to add some sales volume without compromising exclusivity, but that opportunity may have passed.
Third, Ferrari's cars are spectacular, but they cost a lot to develop. The Wall Street Journal recently noted that Ferrari's research-and-development spending in 2014 represented just over 20% of its revenue. That's nearly double the percentage spent by Porsche, and roughly four to five times the percentage spent by most of the big global automakers.
That means that Ferrari's costs will always be disproportionately high. The company's pricing power is impressive, but its margins are merely good: The difference is largely in the development costs. That's unlikely to change.
Now what: There may be a mad scramble for shares in the hours and days following Ferrari's IPO. That could send prices soaring -- but that increase is likely to be temporary.
If you're looking to own a stake in the greatest car company of all, I think you'll be better off waiting a little while. Prices are likely to come back down after that buying scramble passes, and as more shares are distributed to FCA shareholders and make their way to the marketplace.
After a few months, we'll have a better read on how Ferrari is likely to look as an investment over the next few years. If there's a time to buy, that's when we'll find it. Stay tuned.
