Investors may be interested in examining previous successful companies to identify potentially profitable stock choices for the future. The belief is that companies that have been successful in the past will continue to be successful.
Ferrari ( RACE 0.27% ) , a prominent supercar manufacturer, has significantly boosted the profits for its shareholders. Over the last five years, the company has shown remarkable performance. auto stock has increased by 166% (as of August 9), outperforming the wider market. S&P 500 by a mile.
Is it still possible to include Ferrari in your investment portfolio at this point?
Ferrari is a distinctive company.
There is no doubt that Ferrari is a top-tier company known for its excellence. The key factor contributing to its success is its solid foundational performance.
Over the last few years, Ferrari has achieved impressive results. From 2018 to 2023, there was a consistent annual growth rate of 11.8% in revenue. In the latest quarter, which ended on June 30, 2024, there was a significant increase of 16.2% in sales compared to the same period last year.
The increase in revenue is impressive, but what is truly remarkable is the significant increase in profitability that has come along with it. Ferrari is proud to have achieved outstanding results in this regard. The operating margin refers to the ratio of a company’s operating income to its net sales revenue. With a revenue growth of 29.9%, along with continuous share repurchases, the adjusted diluted earnings per share (EPS) in the second quarter increased by 139% compared to the corresponding period in 2019.
In addition to its financial success, Ferrari possesses other notable qualities that set it apart as a unique company. The brand serves as the company’s most valuable asset, contributing to its strong competitive advantage. Developed over numerous years, Ferrari’s prestigious racing history and exceptional product quality and design further enhance its brand value. I believe it would be extremely challenging for anyone to imitate the influence wielded by this brand.
Without a doubt, Ferrari is known for its luxury status. The company deliberately manufactures a small number of vehicles each year to maintain high demand. While it is possible for the business to increase production and generate higher sales and profits, this approach is not preferred as it would negatively impact the brand reputation.
As a result, Ferrari possesses remarkable qualities. pricing power Certain high-end models of Ferrari are bought for millions of dollars due to high demand from buyers. Warren Buffett, often considered the top investor, considers pricing power a key indicator of a successful company, and Ferrari is seen as excelling in this aspect.
Additionally, this business offers a sense of security to its investors. Ferrari is relatively immune to disruptive forces and is more shielded from external challenges such as inflation and economic downturns compared to most other companies. Despite external circumstances, Ferrari continues to operate smoothly and consistently.
Where can the opportunity be found?
There are numerous reasons to appreciate this company. Those who invest time in getting to know and comprehend Ferrari would be left with a positive impression.
However, this does not imply that the stock should be purchased automatically. The market is well-informed about Ferrari’s top qualities. Consequently, the shares are traded at a The ratio of a company’s stock price to its earnings is referred to as price-to-earnings. The price-to-earnings ratio is 51. This valuation is too expensive for me, regardless of how great the business may be.
According to the average predictions of analysts on Wall Street, the earnings per share (EPS) is expected to increase by 12% annually from 2023 to 2026. However, this growth rate does not seem to warrant the high valuation currently being assigned. Those who choose to invest in the stock now are essentially banking on the valuation remaining high, which seems unlikely considering that the S&P has a price-to-earnings (P/E) ratio that is less than half of Ferrari’s.
In my opinion, the most suitable approach would be to include Ferrari in the list of stocks to monitor. Afterwards, it would be wise to wait for a more favorable opportunity to enter the market. This would entail waiting for the price-to-earnings ratio to decrease to approximately 35.
