Ferrari’s Electric Future and the Evolution of Luxury Investing

Ferrari’s Electric Future and the Evolution of Luxury Investing

Josh Rubin: Welcome back to the Thornburg Investment Insights Podcast. I’m your host Josh Rubin, a client portfolio manager at Thornburg. Today, we’re continuing our “On the Road” series. In the last couple of episodes, we’ve been talking about global luxury, both what makes it an attractive place to invest along with how trade dynamics or some of the moving pieces in the global economy have been impacting buyers purchasing behavior over the last several years. In this episode, we’re going to move specifically into a recent research trip. Our portfolio manager, Sean Sun, who oversees international equity strategies at Thornburg, recently traveled to Italy, both for the Ferrari Capital Markets Day and for in depth meetings with Brunello Cucinelli.

Let’s start first with your travels in Europe and let’s start with Ferrari, just because we’ve been spending more time talking on the fashion side. But for Ferrari, you know, you’ve done a lot of comprehensive research over the years, but the point of this trip was specifically attending their Capital Markets Day in Maranello. And what we know at a high level is that the Capital Markets Day drew very intense attention, and also a surprisingly sharp reaction. What happened?

Sean Sun: Yeah. It was a very highly anticipated Capital Markets Day because Ferrari is about to fully unveil their first ever electric vehicle, what they call the Ferrari electric car. And while the company has yet to fully, reveal what the car actually looks like, they have previewed. And they previewed over the weekend some of the unique in-house technology that the company has developed specifically for the like, for their electric vehicle.

They’ve developed a variety of proprietary technologies, including a high voltage battery pack, which can be replaced over time. They say it’s, very strategically important to control this component of the electric vehicle. They’ve also developed specialized electric motors for each axle. They’ve developed this unique active suspension system as well. And, you know, actually at dinner, I was very fortunate enough to sit near the CEO, Benedicto, during dinner. And I asked them about the new electric vehicle. What are you most proud of, that you accomplished for this upcoming electric vehicle, which will be announced fully unveiled early 26. And he said it was the amount of weight they reduced from the vehicle where they designed the chassis and the battery pack and the components and things like that.

Because, as you may know, the typical electric vehicle is much heavier than an internal combustion vehicle because of the battery pack for the most part. And what they’ve done is they’ve engineered it such that, it’s much lighter and it drives much like you’d expect a Ferrari to drive quick turns really well, handles really well. So he said that he is most proud of that.

So we you know, we’ll know more in a bit. But, you know, another cool part of the CMD was the company gave investors a tour of the new $250 million, what they call E-building, where the new electric vehicle, as well as a variety of hybrids will be produced. And, you know, the interesting thing about Ferrari in a luxury context is that, you know, it’s a car company, but is it a car company or is it a luxury brand?

Some would say this is a car company, but you know what? They may be selling cars, but they’re only selling 13,000 cars a year. So, what they’re selling truly is luxury exclusivity. Only 90,000 people are currently active clients of Ferrari. So, a very, very small customer base. And, you know, the CMD was very informative and went very well.

It was all well and good until the financial guidance was released. And the issue there was, it basically fell well short of street expectations. Ferrari is guiding to 2030 growth to be out of a 5% CAGR. And for EBITDA to grow at about a 6% CAGR and for EPS to be at about €11.5, which is about 20% short of street expectations.

So, that was very disappointing because the street was more like, you know, high single digit growth. And it basically sent the stock down about 15% that day. But I think Ferrari’s just being conservative. If Ferrari were only going to hit these targets, then yes, that reaction might be fair. But I view these guidance numbers that they released at the CMD as more of a floor than a target, and Ferrari has historically been very conservative.

At the last CMD, they achieved their five-year targets in less than four years. So, I’m looking at this. As you know, the short-term conservatism doesn’t really change the long-term trajectory.

Josh Rubin: Okay. But maybe you can help us put a few elements of Ferrari stock in context. So, they produce about 13,000 vehicles a year. Obviously, the share price changes every day, but give or take, what’s the market cap of Ferrari?

Sean Sun: Yeah. The market cap of Ferrari is about $70 billion today. And it’s trading at about 35 times earnings, which relative to other consumer companies and maybe consumer staples are a bit richer than them. But when you compare Ferrari to and especially much more expensive than any auto company out there, except for maybe Tesla. But when you compare Ferrari to, I think the more comparable pure set kind of these absolute luxury companies sitting at the very top of the luxury parent like a Hermes or Brunello Cuccinelli, these absolute luxury companies are trading over 40 times earnings. So Ferrari, at 35 times earnings seems reasonably priced considering the potentially long duration of growth here. This is a brand that’s been around 50 plus years. I can see them being around for another 100.

Josh Rubin: So another sort of consistency in the luxury space, regardless of what type of products a luxury company is producing, is, it just commands a higher valuation multiple. So we sort of talked earlier. There’s revenue side, there’s higher margins. There can be higher cash flow and you get a higher multiple, because of the positive perceptions investors have about the luxury earnings trajectory.

Sean Sun: Yeah, I think the higher valuation is warranted from a combination of the quality of the business as well as the duration of growth. You can count on resilient growth for very, very long periods of time. There’s this concept of like Lindy-ness like the longer something’s been around, the longer you expect it to be around. And a Ferrari and many other luxury brands have been around for a long time already.

I expect them to be around for a long time, or well into the future, assuming they manage their brand equity and scarcity and things like that well.

Josh Rubin: Okay. And given that. So if Ferrari were to do better than the guidance they gave at the CMD, is that because they may choose to produce more vehicles because demand is so strong, where do you think it would come from, pricing or cost management to get the earnings higher?

Sean Sun: We did. We did a bottom-up analysis here, trying to determine if that 5% growth into 2030 is conservative or not. And when you look at just the new products alone from the upcoming F80 supercar, which is priced at nearly $4 million and it’s already fully allocated to the to the top collectors to new cars, replacing older cars like the Amalfi, replacing the Roma at a 20 to 25% price premium, and then a brand new product like the aforementioned electric vehicle. I think the combination of pricing growth and a little bit of volume kind of slow single digit volume growth, looking at it very bottom up, fundamentally, there’s no way that 5% growth is kind of in the cards. Just when you break down all the kind of building blocks of growth we see going forward.

Josh Rubin: Great. So maybe shifting now, Bruno Cuccinelli is both a person who’s still alive and a company that’s publicly listed. Now, you went and visited with the company and had a meeting with Bruno Cuccinelli himself. Let’s talk about that.

Sean Sun: For those who don’t know, Brunello Cuccinelli, this is a boutique luxury brand, founded in Italy. And it’s one of these rare brands that really feels a bit more like a cult than a traditional fashion house. It was founded in the late 70s by Brunello Cucinelli, himself the namesake in a small workshop in this little medieval village called Salomao, in the idyllic Italian countryside. And from the very beginning, his idea was to build this business, rooted in what he calls humanistic capitalism, that is, this combination of treating profit and purpose as like, not at odds, but very complementary. They’re still a very small brand. They rely on deeply artisanal production. About 85% of all their product comes from these small little workshops where the workers are paid fair living wages well above local averages. And the history with Brunello Cuccinelli is, he started initially with cashmere, when no one else was really working with it to that extent and he elevated it with both design and fine craftsmanship to these kind of never before seen heights. And over time, the Brunello Cuccinelli brand has become synonymous with this kind of trend in luxury these days called quiet luxury. And quiet luxury, these days is about, no big logos, very understated, designed really well, like, kind of, with really the last kind of be the evergreen rather than chase trends. If you’ve ever watched the show succession on HBO, oftentimes what the characters are wearing on there is what you consider quiet luxury. Very high quality pieces that don’t look expensive but actually are. And, you know, this quiet luxury trend has actually been performing very well in China, for instance, because we talked about earlier about kind of the, a bit of a crackdown from the government on, kind of more conspicuous consumption. So, Brunello Cuccinelli’s been growing very well in China as well as you know, the wealthy still want to consume, but they don’t want to kind of be, as ostentatious with their, their luxury consumption. Brunello has is very focused client base. They sell about only 2 million pieces a year to a very small number of clients, about 400 to 500 clients a year, only about 4 to 5 pieces each. And given the relatively small client base, and the relatively small number of pieces they sell to each client, we think there they’re there’s still a really long runway to continue to grow. And you’ve seen it in their numbers. They continue to grow consistently 10% a year. Even in the more recent years, where the luxury industry has been kind of more flattish in terms of overall growth.

Josh Rubin: It seems like a good time to pause and just make a quick shout out to Tom Ford. A number of people know Tom Ford for saving Gucci along with his current fashion line, but Tom Ford is the son of Santa Fe, New Mexico, graduate of Santa Preparatory  School. And so Tom Ford, if you’d like to come back to Santa Fe, I’m confident we have a lot of local artisans very happy to produce fine pieces at a slightly above average wage to help you grow that the next line of, you know, your success.

So anyway, that’s the Tom Ford aside. Now back to Bruno. Sean, when we think about, the way that Bruno Cuccinelli wants to maintain sort of a small client side but still go global, how do you balance that? How does a company do you roll out more stores or broaden your distribution while still keeping sort of a really narrow focus?

Sean Sun: Yeah. You know, at dinner, Brunello really emphasized this concept of, he really wants his brand to be at the very top of the luxury pyramid, and he really wants to maintain a combination of exclusivity and desire. He doesn’t want the brand to be oversaturated. He doesn’t want the brand to be everywhere. And as a result, he has his target of growing 10% a year. He calls. He said, he mentioned that having undisciplined growth can really kill exclusivity. And so their model is very much intentionally restrained. 10% a year growth. And he said, if you grow a 10% a year for the next seven years, you’ll still double. So it’s still healthy growth, but it’s not so, so much growth that you kill that exclusivity.

And he said that, you know, he’s trying to build this brand for not the next 50 or 100 years, but the next couple hundred years. And I think that’s a that’s a powerful concept because part of luxury is like, you know, you’re part of this, like Brunello is a bit of a cult. You’re part of this cult that kind of if you know, you know, I’m, we’re Brunello or Brunello, and we doesn’t you don’t want to be oversaturated.

Josh Rubin: Great, well Sean, I think in these pretty complex times right now both for global growth for geopolitics and global trade, luxury definitely is a differentiated way to have exposure to consumers across the world. So, thanks a lot for sharing these insights with us and we look forward to hearing after your next trip.

Sean Sun: Yeah, thanks for having me, Josh.

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