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Ferrari Valuing the Prancing Horse Case Solution

Solution Id Length Case Author Case Publisher
2446 3245 Words (16 Pages) Michael Moffett Thunderbird School of Global Management : TB0459
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Ferrari through its low volume production strategy and product innovation through research and development has earned a reputation of being an exclusive and prestigious brand. It has built a loyal customer base over the years and only serves an exclusive customer segment of high net worth individuals who have a taste for luxury goods and are willing to pay a high price for the brand value associated with Ferrari. After years of success Ferrari has taken the next step of an Initial Public Offering to have its shares traded at the stock exchange. Discounted cash flow analysis and valuation of the company through comparative multiples shows that Ferrari is in a strong financial position with potential for growth. While its operating and gross margins are significantly higher compared to other auto manufacturers in the industry the company’s growth rate is low. With it now becoming a public limited company investors may demand higher growth rates and higher returns on their investment which might lead to Ferrari expanding its customer base or diversifying its limited portfolio.

Following questions are answered in this case study solution

  1. What do you believe is the key to Ferrari’s brand value? What does Ferrari need to do overtime to retain and potentially build that value?

  2. What is the primary market for Ferrari sales?

  3. How does Ferrari’s financial performance compare to other global automakers?

  4. How Ferrari has been able to achieve such high gross and operating margins compared to its competitors?

  5. What are the fundamental principles of the discounted cash flow valuation?

  6. What key variable inputs or assumptions are of most critical interest for Ferrari’s valuation?

  7. What do you think is a relevant range of values for Ferrari’s Discount Cash Flow (DCF) valuation?

  8. What conclusions can you draw from the comparative analysis? Are these in any significant way different from what the DCF analysis shows?

Case Analysis for Ferrari Valuing the Prancing Horse Case Solution

1. What do you believe is the key to Ferrari’s brand value? What does Ferrari need to do overtime to retain and potentially build that value?

Ferrari possesses a number of care pillars that lay the foundation for its values and success. Over the years it has built a robust and superior brand that derives its value from its highly loyal customer base. It has built a prestigious brand image and serves an exclusive segment of the market that has high purchasing power which gives Ferrari access to growing wealth across the globe. Highly loyal and affluent customers means that Ferrari can charge any price they want in exchange for the brand value they provide, this gives the company tremendous control over prices leading to high profit margins. Ferrari’s racing heritage and the exceptional talent running and operating the business contributes to its powerful brand image. In order to provide superior value to its exclusive customers, Ferrari makes use of leading-edge and innovative engineering capabilities. It has built a highly efficient and customizable production process to produce only the highest quality product. It is this prestigious image in mind of its customers and the superior quality and value Ferrari provides to its customers that contributes to its brand value. In order to sustain and further build onto its brand value, Ferrari should capitalize on emerging opportunities such as demographic changes and growth in the market size of their target customers as well as the rise in spending power of customers. However, the growth of the company should be in a controlled manner with its focus being only on the particular customer segment it has served for years to preserve the exclusivity of the brand. If during the process of growth and expansion Ferrari stars catering to diverse customer segments it risks losing its brand image and prestige in minds of its existing customers and might lose its niche and competitive edge in the market. Hence, any future plans should be made while preserving the brand image and value of Ferrari.

2. What is the primary market for Ferrari sales?

Ferrari has positioned itself as a luxury car manufacturer pursuing the value-based poisoned strategy. Its production volume is low as it pursues an exclusive and scarce strategy. Ferrari has a reputation of serving only the exclusive segment of high net-worth individuals. The cars are priced and designed in such a way that only the affluent with significant purchasing power and interest in luxury cars can afford and buy Ferrari’s products. The company derives its value and reputation from this scarcity and controlled sales volume. The wealth and number of individuals falling in the target demographic segment of Ferrari has grown over the years, however, this growth rate has been comparatively lower than that for other businesses and segments. With different countries having different per capita income and living standards the size of the target market for Ferrari differs among countries. Developed and prosperous countries have a higher proportion of high net-worth individuals compared to developing companies and hence there exist larger markets for Ferrari products in richer countries compared to poor countries. This can be witnessed in the sales volume from different countries for example in 2014 approximately 45% sales were derived from Europe, the Middle East, and Africa while 35% were from America, 11% from the Asia Pacific, and 9% from Greater China. 60% of the total global high net worth individual population lies in four countries- United States, Japan, Germany, and China and hence are the primary market for Ferrari. The importance of China as a market is on the rise as the wealth of the population in China has been growing along with the preference for luxury goods. With the announcement of IPO, there is concern over if Ferrari would have to expand its target market and let go of the exclusivity of its primary market in order to achieve more rapid growth.

3. How does Ferrari’s financial performance compare to other global automakers?

An analysis of the financial margins of Ferrari compared to its competitors namely Volkswagen, GM, Toyota, Ford, Fiat, Daimler, BMW, and Audi, highlights that Ferrari is performing significantly better than other players in the industry. Ferrari does significant spending on research and development with 20% of its revenues used up in research and development compared to its competitors spending on average 5% and luxury car manufacturer Porsche spending around 11%, second highest in the automotive industry. Among the global automotive industry, Ferrari stands out with exceptional gross and net profit margins. The gross margin of Ferrari is 45% more than twice any other player in the industry. The difference in margins is particularly significant compared to car manufacturers catering to diverse customer segments. Companies selling luxury cars such as BMW and Audi have similar margins to Ferrari. Ferrari has the highest operating margin in the industry of 14.1% and the second-highest net profit margin of 9.6% compared to 10.8% of BMW. Due to its high pricing and conservative cost structure, it can boost the highest operating margin in the automotive industry. Even with its competitors achieving a higher volume of sales and revenues and employing a greater number of people it has been able to achieve a 311% spread in operating and gross margins compared to an average 12% spread for other luxury automakers. 

However, Ferrari has a small product portfolio with only eight vehicles accounting for 70% of sales which means less diversification and can be a problem as revenues are concentrated in a few products. Ferrari’s sales volume is low which leads to the risk of making customers wait and losing potential customers to competitors who can provide cars with less wait time and have a greater variety to choose from. 

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