Ferrari Case Study Write Up PDF

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Ferrari Case Study Write Up...

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Case Studies in Finance

Ferrari Case Study Summary Ferrari, an Italy-based company, is famous all over the globe for its exclusive and luxurious sports cars. The company was initiated and built by Enzo Ferrari but only 10% of the firm is owned by the Ferrari family. The remaining 90% ownership was in the hand of Fiat, a car manufacturer and a partner with Ferrari. From a private company, the company is looking to go public and is already in the process of an IPO to sell the 10% stake being held by the Ferrari family. The reasonable price range for the shares was set to be between $48 and $52. Additionally, during the road-show, there was also strong demand of 17.18 million shares for the initial offering. Since then, they will have 189 million shares outstanding to be offered on the day of the initial public offering. In this following report, our group will discuss the key problems and questions Ferrari faces regarding their IPO decision, list out different valuation approaches namely the DCF and the Multiples valuation approach along with the results of the intrinsic value for Ferrari (RACE) stocks. The price which we believe Ferrari should be sold at is $48.00. Throughout this analysis of the company and the valuation we will describe how we have come to that conclusion.

II. Identification of Key Problem(s) and Question(s) Similar to any private firm going public, the major question Ferrari and their team is facing in the process of an IPO is around the price of their stock - what is a reasonable price within the determined range for one share of the company’s stock? Related to this point, another question is also considered: what are the applicable methodologies to be used in Ferrari valuation? What are the recommended price per share for the stock using each way to evaluate and what are the strengths and weaknesses associated with each method? What can be used as industry benchmarks for Ferrari to price themselves accordingly given that there were hardly any close competitors operating in the exact business as Ferrari? While pricing is the most central topic of the firm’s IPO, Ferrari’s leaders have also been questioning about the right direction for the company going forward after their big move of going public. Since Ferrari has long been known as a private company selling premium limited sport cars, this IPO decision along with the tendency of shifting Ferrari’s focus on production and increasing quality more in the future has raised a concern of losing the long known reputation of being an exclusive brand. As Ferrari completely transforms into a separately traded company, they may face certain difficulties to sustain as an independent entity due to their small scale.

III. Analysis of Alternatives (MIKE SCHIAVELLO) One possible option to determine Ferrari’s IPO price should be by looking at the discounted cash flows which can be seen in the tab titled “DCF”. By analyzing this projection, we can see the future cash flows and we can see that Ferrari will continue to profit and grow. We also calculated the terminal value which shows that Ferrari has the ability to keep growing indefinitely. By performing a sensitivity analysis, we can figure out how the share price will change with different growth rates, weighted average cost of capital and also terminal value rates. By using this method, we came to a share price of $50.29. This method is accurate for Ferrari only given that the cash flows projected take into consideration a changing growth rate over the years. This gave us a growth rate for Ferrari of 3%. But this does not take in the EBITDA multiples of similar companies into consideration and comes to a higher share price than is recommended in the case. It also assumes that Ferrari will continue profiting which cannot be guaranteed because there is always risk involved in the future of any company. This is one possible method to analyze the possible price of Ferrari for its IPO but can be done other ways as well. Another possible way to determine the share price for Ferrari’s IPO is by looking at the EBITDA multiples. By looking at EBITDA multiples of companies similar to Ferrari and also analyzing the geomean, we determined that EBITDA multiple for Ferrari would be 14.20, which is higher than the other comparable companies listed. The sensitivity analysis created shows how the price of the IPO changes with different multiples. In our opinion, Ferrari is more of a luxury brand than it is a normal car brand which is why we decided to add more weight to that part of the analysis. By using this method, we came to a share price of $48, which is lower than we wanted since we do not want to undervalue or overvalue the IPO. The most prominent problem with using this method is that it does not take Ferrari’s cash flows into consideration and only considers the multiples of other companies which is an issue since there is no company that is perfectly comparable to Ferrari and also publicly traded. The best option to use to make a final decision for what is best for pricing the IPO is to use a combination of both the EBITDA multiple as well as the discounted cash flows. It is important to use both of these methods and take both into consideration as they both have points of strengths which help price this IPO more accurately. By taking the geomean of the price received from the EBITDA multiple and the DCF, you can come to the conclusion that the price of Ferrari’s IPO should be higher than $48.00. We have come to the conclusion that this is ultimately the best price because it shows the stock is not overvalued or undervalued and it can benefit investors and the company itself. The strengths of using this method is that it considers both the EBITDA multiple as well as the DCF given that both are extremely important and account for a large portion of the company. The main problem with this method is that Ferrari does not have a perfect comparable company which means that the EBITDA multiple of some of these companies is not relevant to Ferrari.

IV. Recommended Solution(s) Based on all of the information, we believe that the Ferrari stock (RACE) should be listed with an IPO price of $48 on the New York Stock Exchange. In order to make this valuation, a number of things had to be taken into account including two financial models; the Discounted Cash Flows Model (which utilizes finding the current value of the future cash flows of the asset) (Exhibit 1) and the Multiples Model (which utilizes finding the value of a company by comparing it to competitors or similarly run firms in order to find its value) (Exhibit 4). While both models were taken into consideration to reach a conclusion on what the IPO price should be, we decided to value the accuracy of the DCF Model more than we did the Multiples Model. This is because the nature of the DCF model depends on internal measurements of the company rather than making a comparative valuation based on how competitors are measured. Additionally, we felt that, while there are comparable, publicly traded car manufactures and luxury brands, there are none that were close enough of a comparison to Ferrari that would make the Multiples Model accurate enough to solely rely on as a measure of what the IPO price should be. With this in mind, we decided to take the price that the DCF Model yielded, $50.29 per share, and reduced it to the minimum price that the FCA group recommended in order to account for the Multiples Model. In order to measure the success of this valuation, it will be immediately obvious as the IPO is described as happening the next day. Should the stock not sell well in the primary market and decrease in value as it is offered to the secondary market, it will be clear that the price is too high, and should the stock be bought up rapidly and resold on the secondary market at a higher price, it will be clear that the stock was undervalued. However, at a price of $48, it should be expected that the primary stock market should respond well to this valuation because, as mentioned before, DCF model explains that the stock should be valued higher than $48, however, the uncertainty expressed in the Multiples Model made us lower the valuation just to be sure that the stock is received well. By offering the stock at this price, the goal laid out by the company's CEO, Sergio Marchionne, is to spin off Ferrari from the FCA group in order to create more value for the two as independent firms as well as promote and extend Ferrari’s value should be attainable.

V. Conclusion Lila An initial public offering is an important aspect for a company to gain capital and investors. In Ferrari’s case, it is crucial for their stock issuance to perform well as it provides an opportunity for Ferrari to grow and expand. However, the issue with initial public offerings is that if the stock is overvalued it can lead to losses for the company, and if it is undervalued the company loses the opportunity to raise as much capital as possible, leading investors to profit on the secondary market instead of the company profiting off of the IPO. The IPO for a business

needs to build buzz and excitement for investors but not be overly advertised and publicized. Furthermore, as Ferrari is an exclusive and luxury brand that is going public, one of their primary concerns is to keep intact the distinctive and extraordinary feeling that comes with owning a Ferrari vehicle. The business needs to preserve the uniqueness of the brand while going public to further develop and enable new opportunities for the company. That is why, as previously mentioned, for Ferrari’s brand and business $48 is the ideal IPO stock price. It ensures that the stock issuance is not overvalued, leading to an ultimate under performance and detrimental effect on the company’s reputation. The combined results of the DCF and Multiples Models evaluations leads to $48 as the ultimate compromise. Although DCF proves a valuation higher than $48 would be beneficial, doubts in the Multiples Models shows that a lower valuation is the smarter option. $48 is the best option to create value for both firms while ensuring that Ferrari’s IPO is well received and the stock issuance ultimately performs well.

Exhibit 1

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