Thursday, August 20, 2015

Ferrari: Notes from the Form F-1

I recently read the Form F-1 (which you can find here) and thought I would share some of the more interesting parts... at least to me.

A little background first.  In October, 10% of Ferrari will be sold to the public via IPO, then the remaining 80% will be spun off to Fiat Chrysler shareholders early next year (the other 10% is owned by Piero Ferrari).  Many Fiat shareholders (including myself) bought shares before Fiat and Chrysler merged in large part due to the value of Ferrari.  You could of bought Fiat (which at the time owned less than half of Chrysler, Alfa, Maserati and 90% of Ferrari) for less than the value of Ferrari.  Having Ferrari as backing put a nice basement on the downside and gave me confidence investing in a small Italian auto manufacturer with a ton of debt.  It also helped that CEO Sergio Marchionne was focused on creating shareholder value and understood the value of Fiat's assets.  Anyway, here we are.

Structure post IPO:

Intro from the F-1:

2014 Financial Summary
Revenue:  €2,762
Net Profit:  €265
Adj EBITDA:  €693
EBIT:  €389
Cars Produces: 7,255

Net Revenues by Segment:


One of the most discussed issues regarding Ferrari has been the number of cars produced and whether going above the 7,000 car cap limit is dilutive to the brand.  It's officially the limit is no longer...

"Our strategic business plan reflects a continuation of the low volume strategy, while gradually increasing shipments to approximately 9,000 units per year by 2019."

Shipments from 2010-2014:

I've seen some argue that increasing production to 9,000 or 10,000 cars would dilute the brand and it's exclusivity.  In the whole world there will only be 9,000 cars sold in 2019.... 9,000!  In the world!  That's pretty damn exclusive IMO.  A move to 9,000 cars would be a 24% increase over 2014 or a 4.5% annual growth rate through 2019.  That's pretty reasonable.  Of course beyond 2019 I'm not sure  how they'll proceed.  They also mention that Ferrari's market share in the luxury performance car market has declined due to the rise of wealthy individuals in conjunction with the static 7,000 car cap limit.  They don't focus on market share or consider it relevant, but it does illustrate how Ferrari could be better aligned with its growing wealthy customer base.

Sergio has mentioned 10,000 cars is possible.  He's also stated that Ferrari should sell one less car than demanded.  His argument is essentially that there is a greater growth of wealthy individuals and Ferrari should grow with that demand.  He also mentioned that exclusivity can be so extreme that it becomes absurd, referring to the 3+ year waiting lists and 7,000 cap limit.

I agree that maintaining exclusivity of the brand is paramount.  One of the biggest mistakes luxury companies make is becoming greedy in the pursuit of short term profits.  Inevitably it bites them in the butt by cheapening the brand over time.  This happens quite a bit in fashion (Tommy Hilfiger, KORS, Coach).  They try to sell more clothes, bags or whatever to more people and all of the sudden everyone and their mom has one of these things.  It's no longer cool or exclusive.  Not everyone will own a Ferrari (obviously), but it could become less desirable if it doesn't maintain ultra-luxury status.

I don't know how turning Ferrari into a luxury brand opposed to just a luxury car company will affect the long term brand value.  Will Ferrari theme parks, clothes, key chains or whatever cheapen the brand?  They already have many of these, but it's worth keeping an eye on.  As far as car production goes, 7,255 to 9,000 cars will not damage exclusivity.

John Elkann, the head of the Agnelli family and CEO of Exor Spa (holding company that controls Fiat), will own a majority voting stake in Ferrari.  His prescence gives me comfort in the long term future of Ferrari.  I think Elkann will show the same patience he has for Fiat by allowing and encouraging a long term approach that upholds the brands ultra-luxury status.

Formula 1 Racing Team

I have to admit I had no idea how big Formula 1 racing is.  In 2014 their were 424 million television viewers, which is the most watched annual sport series in the world.

"More generally, Formula 1 Racing allows us to promote and market our brand and technology to a global audience without resorting to traditional advertising activities, therefore preserving the aura of exclusivity around our brand and limited the marketing costs that we, as a company operating in the luxury space, would otherwise incur."

Ferrari takes a share of annual profits from the FOWC (Formula One World Championship Limited), which includes television broadcasting royalties and other commercial activities.  60% of the profits are distributed to the teams based on the ranking of each team.  So the first place team gets the most money and last place the least.  There is sponsorship money from the likes of Phillip Morris, Shell, Santander and others.  Ferrari is also the only team that gets paid a fee for just being a part of the race.  All of this money is used to offset the cost of the racing team.

The racing team is kind of a marketing, client schmoozing and R&D department all in one.  Many of the racing teams designs, technological advancements and enhancements make their way onto later production models.


What I found most interesting was the engine segment.  Revenues are up 300% since 2011 and went from 3.5% to 11.3% of revenue.  This is mostly due to the ramp up of Maserati, which uses engines built by Ferrari.  This quarter’s revenues were lower due to a decrease in Maserati sales, but longer term this could be a nice area for growth.  It’s a double edge sword that depends on the success of Maserati. Sergio is planning to introduce multiple new models over the next few years including the Levante SUV next year.

"Net revenues generated from engines were €311 million for 2014, an increase of €123 million, or 65.4 percent, from €188 million for 2013. The €123 million increase was mainly attributable to an increase in the volume of engines sold to Maserati, and to a lesser extent, driven by an increase in net revenues generated by the rental of engines to other Formula 1 racing teams."

Here’s the deal with Maserati:

"Our arrangement with Maserati is currently governed by a framework agreement entered into in December 2014. Pursuant to this agreement, the initial production run of up to 160,000 engines in aggregate through 2020 is expected to increase to up to 275,000 engines in aggregate through 2023 to cater to Maserati’s planned expanded model range and sales. Volumes and pricing are adjusted from time to time to reflect Maserati’s changing requirement."

"In order to meet our obligations under our agreement with Maserati, we constructed a new production line dedicated to the Maserati V6 engine, which was funded by Maserati."

I believe Alfa is using Ferrari engines as well, which is not referenced at all in the F-1.  I found that kind of curious.  Anyway, it could be a huge boon for engine growth since Alfa is being positioned for a bigger/broader market than Maserati.  The stated goal of 400k Alfa's is a ridiculously lofty goal, but for Ferrari's purposes anything at all will be good for business.  

What I like about the growth in engine sales is it can ramp up quite a bit, it produces good money for Ferrari and all while having very little impact on the Ferrari brand.  I don’t know if the market even realizes that Ferrari makes money by selling and producing engines. Maybe, but I highly doubt they realize the growth potential here.

Markets by Region

"We divide our regional markets into EMEA, Americas, Greater China and Rest of APAC, representing respectively 45 percent, 34 percent, nine percent and 12 percent of units shipped in 2014. In recent years we have allocated a higher proportion of shipments to the Middle East and Greater China and, to a lesser extent, the Americas and a lower proportion to Europe, reflecting changes in relative demand as part of our strategy to manage waiting lists and maintain product exclusivity."

True to the statement above you can see that Middle East and APAC shipments have been growing the most as a % of total cars shipped.  

Economic Sensitivity

"During the financial crisis, suffered only a single year of modest (less than 5 percent) decline in shipments in spite of the luxury status of our cars and the discretionary nature of their purchase."

I was happy to see this quote and it's quite the accomplishment if true.  Still I wish they would give more information on shipments and financials over the last decade, but I didnít see anything prior to 2010.  (If anyone has 10 year financials please let me know!)

The chart above shows Ferrari shipments vs the luxury performance car index.  You can definitely see a dip in 2008-2009, but much better than the index, which includes sport cars with 500hp and a retail price above 150,000 euro (Aston Martin, Bentley, Ferrari, Lamborghini, McLaren, Mercedes Benz, Rolls Royce).  The Ferrari data is based on the top 22 countries (approx. 80% of total shipments in 2014).  

"While affected by global macroeconomic conditions, the luxury goods market is also impacted by several more specific factors, such as, in recent years, the significant economic growth and wealth creation in certain emerging economies and rising levels of affluence and demand from the emerging middle and upper classes in Asia and a general trend towards urbanization. Particularly following the 2008-2009 downturn, this has led the global luxury goods market to return to perform better than global GDP, as shown in the chart below."

Platforms and Production

Just like the big boys Ferrari utilizes common platforms in order to reduce fixed costs by using two architectures that enable both front and mid-rear engines for flexibility.

Over the last decade the Ferrari facilities have been significantly upgraded.  This will allow them to ramp up production without any issues as the cap limit is lifted.  It should also help boost margins by spreading production costs across more cars.

"Our facilities can accommodate a meaningful increase in production compared to current output with the increase of weekend shifts or, to address special peaks in demand, temporary employees. Production could be increased even further with the introduction of a second shift on car assembly lines compared to the single shift currently operated."

I think this is one of the bigger parts of the bull case on Ferrari.  As they raise production to 9,000 cars not only will that help the top line, but costs should rise slower leading to better margins going forward.

Limited Edition Cars/ Life Cycle

"The exclusivity of a particular product offering is also a relevant factor in its profitability. For example, in November 2013, we launched the LaFerrari, our latest limited edition supercar, which was planned for a total production run of only 499 units. In light of the exclusivity of the offering, along with the supercar advanced technological and design content, LaFerrari has a sales price in excess of €1 million, which is much higher than other models in the Ferrari product range. Therefore, our 2014 and 2015 net revenues have benefited significantly from shipments of LaFerrari. We expect to complete the production run of the LaFerrari in early 2016. In general, more exclusive offerings generate higher net revenues and provide better margins than those generated on shipments of range models (which include Sports and GT models, V8 and V12 models and represent the core of our product offering) and special series cars. Similarly, our limited edition cars which we launch from time to time are typically sold at a significantly higher price point than our range models and therefore they benefit our results in the periods in which they are sold."

I mentioned it earlier, but without more detail I'm not sure how one-off type models will affect revenues due to their lumpiness.

As for the range models:

"Generally, we plan for a four to five year life cycle for our range models. After four to five years, we typically launch a modified or M model based on the same platform but featuring significant aesthetic updates and technological improvements. This is, for example, the case of the California T, launched in 2014, which replaced and updated the earlier California, featuring new sheet-metal, new interior, a revised chassis and a new turbocharged powertrain. Typically, four years after the launch of the M-model, we start production of an entirely new model based on an completely new or overhauled platform. Therefore, the cumulative life cycle of each of our models is approximately eight to nine years, and typically we have launched one new model every year while keeping four or more range models in production at any time. The actual life cycles of our models vary depending on various factors including market response. Special series have different, typically shorter, lifecycles. We usually utilize additional platforms for production of our supercars, such as LaFerrari."

With the range models there is a actually nice steady cycle that can last 8 to 9 years with just one refresh.  I do have a feeling Sergio is aware of the lumpiness and would push for a smoother more predictable one-off production roll out.  But still, not sure how much can be done about this.  We'll just have to be wary of the possibility that current earnings are above average and figure out what the normal earnings power is through a full cycle. 


Since 2005 Ferrari has achieved a CAGR in net revenues of 7%.  This is with production levels that didn't increase much due to the 7,000 car cap limit.  Without knowing the complete picture I think this gives us an idea into their ability to raise prices and how with expanding the cap limit what growth might be possible.  

"We believe our cars performance in terms of value preservation after a period of ownership significantly exceeds that of any other brand in the luxury car segment. High residual value is important to the primary market because clients, when purchasing our cars, take into account the expected resale value of the car in assessing the overall cost of ownership. Furthermore, a higher residual value potentially lowers the cost for the owner to switch to a new model thereby supporting client loyalty and promoting repeat purchases."

This was fascinating to me.  The resale value of Ferrari's are very high and sometimes higher than the original purchase price.  I was aware of that fact, but didn't think about how it makes customers more likely to be a repeat buyer (after selling the old car). Also, it provides stability in new car pricing.

"We seek to increase over time the average price point of our range models and special series by continually improving performance, technology and other features, and by leveraging the scarcity value resulting from our low volume strategy. Furthermore, the content of the cars we sell can be customized through our interior and exterior personalization program, which can be further enhanced through bespoke specifications. Incremental revenues from personalization are a particularly favorable factor of our pricing and product mix, due to the fact that we generate a margin on each additional option selected by the client."

Customization offers items such as rare leathers, custom stitching, special paints, special carbon fiber and personalized luggage to match the car interior, which on average add 15% to selling prices.
And of course there are the limited edition supercars (La Ferrari) that can exceed $1 million per car; as well as, very limited edition series and one-off cars that all have higher average price points.

The Ferrari "Brand"/ Licensing

Marchionne has stated that Ferrari is a luxury brand not just a car company.  A big part of that branding effort is expanding into other areas outside of actual car making. To achieve this Ferrari is looking to expand retail stores and licensing out the brand for theme parks, accessories, sportswear, toys, video games and who knows what else. You can see the list below.  They are also planning on branching out into other luxury goods ìin adjacent lifestyle categoriesî.  Not sure what that means exactly, but I'll be keeping an eye on whether this truly enhances the brand... or possibly has the opposite effect. 

A significant portion of licensing revenues comes from Ferrari World royalties.  At the moment this is the only theme park, but there are plans to open one theme park in each geographical region.  I assume this means at least 4 total, maybe more.  They mention specifically having one in North America and Asia. There is a deal in place to open a European theme park in Barcelona, in which PortaVentura Entertainment will invest 100 million set for a 2016 opening. 

"Net revenues generated from sponsorship, commercial agreements and brand management activities were 17 million for 2014, an increase of €5 million, or 1.2 percent, from 412 million for 2013. The €5 million increase in sponsorship, commercial and brand net revenues was mainly driven by new sponsorship contracts entered into by our Formula 1 racing team during 2014."

As you can tell from the quote above, they lump F1 sponsorship money with the brand licensing so it's hard to say what the parks and other accessories are bringing in.


As a Fiat shareholder I’m pretty excited about the Ferrari spin.  I don’t know what the market will pay for it, but I’ve seen some pretty aggressive estimations including Sergio’s comment that Ferrari is worth "at least $11 billion".   The ADW Capital link below is even more aggressive.  It assumes EBIT margins 3x the current level and 10k cars by 2018.  Too aggressive in my opinion.  And as we've seen in the F-1, they're targeting 9,000 by 2019.  I’ll need to do some more work (and get more information/detail) before I can confidently value Ferrari.  If you made me guess I'd say $5 billion is a fairly reasonable number.  

What I do know is Ferrari is one of the top brands in the world that will be growing revenues at a better than expected rate (4.5% p.a. alone in shipments not including pricing).  From 2005 to 2014 they grew revenues at a 7% CAGR without much of an increase in shipments.  They’ll be scaling to a level where R&D costs from F1 and costs for the production models should remain stable or grow slower than revenues allowing margins to expand.  Also, we have upside potential from a significant increase in engine sales from both Maserati and Alfa Romeo.  Finally there is the expansion into Ferrari “the brand”.  I don’t know what to expect from the theme parks and other Ferrari related products, but it’s worth keeping an eye on and if they do it tastefully it could be another boost to the bottom line.

It'l be interesting to see what happens come October.  Anyway, hopefully I added some value to the discussion.  Let me know in the comment section if you have any gripes, questions or more information on Ferrari.

Links to other Fiat/Ferrari pitches:
ADW Capital- Ferrari Does Not Stand for "Fix it Again Tony"


Saturday, August 15, 2015

13F's: Todd and Ted, Concentrated Portfolios & Some Links

I recently tweeted out some of my favorite 13F's and figured I would make a more expansive post for future reference.  I personally like looking over select 13F's, especially if there are a significant amount of new buys.  Some people dismiss it as useless, but I think if you follow great investors that have concentrated portfolios and relatively long term holdings then it can be extremely useful for idea generation.  I mean really with and it hardly takes anytime to notate new buys, adds, sells of guys you're interested in.  At worst it's simply entertaining to see what these guys are up to.

My personal favorites:

Arlington Value Capital (Allan Mecham)
Akre Capital Management (Chuck Akre)
SQ Advisors (Lou Simpson)
Berkshire Hathaway (WEB, Todd and Ted)
Markel Corp (Tom Gayner)

The first three are extremely concentrated and tend to favor great businesses (compounders).  They all have had great long term success; although Mecham is relatively new/young he has done very well.  I think Mecham and Akre have some great under followed ideas that are interesting for deeper dives.

Lou Simpson is great.  As most of us know he was in charge of GEICO's portfolio for decades under Buffett until he retired.  Lot's of high quality companies.  His 10th positions is ~5% of the portfolio!  Love it.  Lots of interesting names... from Liberty Global and VRX to UPS and Wells Fargo.

I'm biased on Berkshire and Markel.  I own significant amounts of both, so selfishly I want to see what these guys are buying.  Gayner has a great track record of beating the market, but honestly I don't find many ideas from his 13F (although, maybe I should).  He has quite a few holdings that are very small percentages of the portfolio.  He calls these his "minor league team", which i thought was interesting.  Basically he'll buy a business he's interested in but doesn't quite understand (like Amazon) and own it for awhile forcing him to pay closer attention.  After awhile he'll either bump them up to the majors or just get rid of the stock if he still doesn't understand it.

With Berkshire I'm more interested in Todd and Ted's picks.  Buffett's are so large and rarely change (although when they do change it's fun to speculate/debate his reasoning, ie. IBM).

After looking at the Berkshire 13F I wanted to see what the portfolio allocations looked like without Buffett's giant holdings lumped in.  So as you can see below I did just that.  It's both Todd and Ted's picks together.  I took out Buffett's Big 4 (WFC, AXP, IBM, KO),  also PG, USB, WMT, GS, MCO,  DE, MTB, USG, COST and QSR.  There might be others I'm missing or maybe one of these isn't actually his picks but it should give us a fairly accurate picture.

Todd & Ted Combined Portfolio (updated)
Stock Shares Held Market Value % of Port
DVA 38,565,570 $3,064,805,000 16.51%
DTV 31,353,468 $2,909,288,000 15.67%
CHTR 8,514,678 $1,458,139,000 7.85%
GM 41,000,000 $1,366,530,000 7.36%
BK 20,680,420 $867,957,000 4.67%
PCP 4,200,792 $839,612,000 4.52%
VRSN 12,985,000 $801,434,000 4.32%
VZ 15,000,928 $699,193,000 3.77%
V 9,885,160 $663,788,000 3.58%
AXTA 20,000,000 $661,600,000 3.56%
SU 22,354,294 $615,191,000 3.31%
LBTYA 10,342,793 $559,234,000 3.01%
MA 5,229,756 $488,878,000 2.63%
WBC 3,777,195 $467,315,000 2.52%
CBI 9,326,921 $466,719,000 2.51%
LBTYK 7,346,968 $371,977,000 2.00%
TMK 6,353,727 $369,915,000 1.99%
VIAB 5,646,721 $365,004,000 1.97%
LMCK 8,000,000 $287,200,000 1.55%
GE 10,585,502 $281,257,000 1.51%
FOXA 6,228,097 $202,693,000 1.09%
SNY 3,905,875 $193,458,000 1.04%
LMCA 4,000,000 $144,160,000 0.78%
GHC 107,575 $115,649,000 0.62%
VRSK 1,563,434 $113,755,000 0.61%
MEG 4,646,220 $76,756,000 0.41%
DNOW 1,825,569 $36,348,000 0.20%
JNJ 327,100 $31,879,000 0.17%
MDLZ 578,000 $23,779,000 0.13%
KRFT 192,666 $16,404,000 0.09%
UPS 59,400 $5,756,000 0.03%
LEE 88,863 $296,000 0.00%
PSX 0 $0 0.00%
NOV 0 $0 0.00%

Anyway, combined they have ~50% in the top 5 holdings and ~68% in the top 10 with a total of 34 holdings.  The DTV/AT&T deal is going through and the recent PCP acquisition will free up quite a bit of cash for the T's to allocate (I think DTV was a joint pick; PCP a Combs pick).  One of the T's made a new buy in Axalta Coating Systems (AXTA), which I'm not familiar with.  Notable due to it being 3% of their portfolio off the bat.  I'd be very interested to hear their thoughts on multiple media companies they own, especially the various Malone entities.

Ok enough Berkshire.  There are a few newer 13F's I've been following (new to me) that I like quite a bit:

Bares Capital Management (Brian Bares)
Abrams Capital (David Abrams)
Giverny Capital (Francois Rochon)
AltaRock Partners (Mark Massey)

These guys are EXTREMELY concentrated (anywhere from 7 to 25 holdings).

Bares specializes in Small-cap compounders so I really like to keep a close eye on his holdings for ideas possibly in the early innings.  Currently Colfax (CFX) is his largest holding at 19.75% of the portfolio.
Brian Bares Interview MOI
Interview MOI (video)

Abrams is a former Baupost guy.  Very concentrated.  Has a good mixture of ugly/cheap/hated and great businesses.  One thing to keep in mind is like Klarman the equity portfolio is only a portion of the whole fund.  Abrams owns some private held companies and debt investments from what I remember.

Stock Shares Held Market Value % of Port
WU  21,608,707 $439,305,000 29.82%
MSFT  4,980,000 $219,867,000 14.93%
DTV  1,714,262 $159,066,000 10.80%
WFC  2,770,000 $155,785,000 10.58%
BKS  5,117,997 $132,863,000 9.02%
OPB  2,270,265 $82,138,000 5.58%
ENT  5,000,000 $65,100,000 4.42%
INXN  2,347,788 $64,916,000 4.41%
WEN  4,250,000 $47,940,000 3.25%
MGI  5,130,000 $47,145,000 3.20%
CCO  3,354,390 $33,980,000 2.31%
VIP  5,001,418 $24,857,000 1.69%
CST  -   $0 0

In Boston, Secretive Hedge-Fund Billionaire Stays in Shadows
Hedge Fund World's One Man Wealth Machine


AltaRock owns 7 stocks:

Stock Shares Held Market Value % of Port
TDG  433,621 $97,422,000 31.07%
CHTR  321,085 $54,986,000 17.54%
LBTYK  1,057,794 $53,556,000 17.08%
MCO  466,915 $50,408,000 16.08%
MA  395,390 $36,961,000 11.79%
V  280,076 $18,807,000 6.00%
IBKR  33,101 $1,376,000 0.44%

Mark Massey MOI Interview
AltaRock Investment Principles

Giverny is run by Francois Rochon.  Fully invested at all times, 25 positions and focuses on great businesses.

Top 10 Picks:

Stock Shares Held Market Value % of Port
BRK.B 522,173 $71,073,000 14.21%
OZRK 876,500 $40,100,000 8.02%
DIS 340,386 $38,852,000 7.77%
WFC 634,507 $35,685,000 7.13%
KMX 533,184 $35,302,000 7.06%
LKQ 1,102,595 $33,348,000 6.67%
VRX 120,382 $26,743,000 5.35%
MTB 170,259 $21,270,000 4.25%
V 289,658 $19,451,000 3.89%
MKL 24,129 $19,320,000 3.86%

Rochon Interview
Rochon Gurufocus Interview

Honorable Mentions:

Pershing Square (Ackman)
Weitz Investment Mgmt (Wally Weitz)
Pabrai Funds/Dalal Street (Mohnish Pabrai)
Aquamarine Capital Mgmt (Guy Spier)
Wedgewood Partners (David Rolfe)
Smead Capital Mgmt (Bill Smead)
Yacktman Asset Mgmt (Don Yachtman)
ValueAct (Jeff Ubben)
MFP Investors (Michael Price)
FPA Crescent (Steven Romick)
FPA Capital (Bob Rodriguez)
Oakmark (Bill Nygren)
Tweedy Browne
Third Avenue (Marty Whitman)

A couple more interesting extremely concentrated funds:  (h/t to @bluegrasscap who brought these to my attention and btw is probably my favorite follow on Finance Twitter)
Tesuji Partners
Lavasseur Capital Partners

And finally the most useless 13F for me:
Baupost (Seth Klarman)

I have no clue... Half are Bio names I won't even try to figure out.  He changes positions frequently sometimes, so I can't gauge his timeframe/convictions.  Plus the equity portfolio is just a part of his whole portfolio. Too hard pile.  Probably the reason he's one of the best.

Feel free to suggest any other good funds in the comment section (especially concentrated, long term value funds).