U.S. stocks are little changed early on Wednesday afternoon, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^SPX) up 0.54% and 0.20%, respectively, at 12:30 p.m. EDT. In a difficult market for new share offerings, luxury auto manufacturer Ferrari NV sold shares at $52 per share -- the top of its pricing range. The shares began trading this morning under the ticker RACE and they have sped up 8.15% at 12:30 p.m. EDT -- a modest pop that suggests they were well priced.
Ferrari: If you can't own the car, at least you can now own the shares. The name needs no introduction thanks to a world-famous brand built on styling, performance, and racing pedigree.
The name further evokes those of legendary figures associated with its storied history: Founder Enzo Ferrari, car designer Pinin Farina, and two of the all-time greats of Formula One racing: Juan Manuel Fangio and Michael Shumacher. "Scuderia Ferrari" remains the most successful team in the history of Formula One, with 16 Constructors' Championship titles.
(Sure, Formula One means absolutely nothing to most Americans, but the association is integral to the brand, and it means something to Ferrari's customers -- even in the U.S.)
But what about the business? After all, that's what you're buying when you invest in the shares (hopefully, the shares aren't just a substitute for owning one of the cars).
In aggregate, auto manufacturers aren't good businesses. The industry has overcapacity and is intensively competitive. As a result, companies have little pricing power, and the capital expenditures required simply to stay in business, let alone grow, are substantial. Not to mention that the industry is facing some significant structural shifts due to the development of ride-sharing and the rise of electric cars.
However, Ferrari doesn't play that high-volume/low-margin game. Overcapacity isn't a problem: Last year, the company shipped just 7,255 cars; it intends to maintain the practice of managing waiting lists for its cars. Its prospectus refers explicitly to its "low volume strategy."
Does Ferrari have a sustainable competitive advantage? Absolutely: its brand (in case that wasn't clear from the exposition above). In its offering document, Ferrari describes itself as an "iconic brand" and the cars it manufactures as "the epitome of performance, luxury and styling." To most car enthusiasts, those statements are uncontroversial. There may be even more exclusive "boutique" car brands, but none of them have the reach, brand awareness, or ambition of Ferrari.
Brand value is an intangible. How does it translate into long-term investment value? That's one of the things prospective investors need to try to quantify before taking the shares for a spin.
New York University's valuation guru Aswath Damodaran has taken a stab at valuing Ferrari under two scenarios: "Status Quo" (super exclusive, low production, high margin) and "Rev it Up" (increase production, introduce a lower-priced model).
Damodaran obtains a similar value for both: 33.40 euros ($37.91) for the former and 31.98 euros ($36.30) for the latter. On that basis, the current price looks pretty expensive, and it may reflect some excess investor enthusiasm elicited by this iconic brand.
Yesterday, my Foolish colleague and auto specialist John Rosevear counseled patience to interested investors, arguing that "prices are likely to come back down after that buying scramble passes, and as more shares are distributed to FCA [Fiat Chrysler Automobiles NV] shareholders and make their way to the marketplace."
I entirely agree: Investors will be best served by waiting for Ferrari's intrinsic value to speed up alongside (or, better yet, overtake) its share price.