FUN with Ferrari’s F.U.V.

14 August 2017 | by Arif Karim, CFA®

Source: AutoEvolution.com

A year ago, when Ferrari’s well-regarded CEO, Sergio Marchionne, was asked if it would jump into the high end luxury SUV foray, he responded “You’ll have to shoot me first” before Ferrari makes an SUV!

A year later, during Ferrari’s (RACE) latest 2Q17 earnings conference call, he confirmed the rumors circulating that the team is developing a vehicle capable of traversing through “sort of uncharted territory”. But he asked for observers to reserve judgement on calling it an SUV of the ilk that a BMW (BMW GY) or Bentley or Porsche (VOW GY) have on the market, i.e. hold the firing squad for now!

So no, there are no credible photos of concept vehicles of the new Ferrari yet and the headline photo is obviously someone’s attempt at forcing a Ferrari SUV into being — die hard fans (with means) won’t have to take fulfilling their desire for a FUV, i.e. Ferrari Utility Vehicle, into their own hands for much longer!

Ferrari’s engineers are currently working on the concept and the company will discuss its idea with its most loyal customers as the idea comes closer to fruition, but for now we can take a shot at the overall sketches of what the FUV could look like…

Lamborghini (VOW GR) made an attempt at a fast high end utility vehicle a couple of decades ago… and this is what they came up with, the “Rambo Lambo” LM002!

Source: Autoweek.com

More modern versions of the performance SUV offer incredible performance if not outstanding handling like the BMW X5M and Bentley Bentayga (Marchionne vehemently denied the FUV would look like any existing SUV!):

Source: Edmunds.com

Source: Autoweek

The Porsche Cayenne is another one that also has amazing handling capabilities and the look of a sporty but elegant SUV (to our eye at least):

 

Source: Edmunds.com

Marchionne’s other company, Fiat Chrysler (FCA IM), which spun out Ferrari last year, recently introduced a high performance SUV with an Italian flair, the Maserati Levante:

Source: Maserati.com

Lamborghini has also taken another stab in this space with the Urus concept SUV, of course with its own slightly flamboyant design philosophy that it is known for:

Source: Car and Driver

When we think about Ferraris, we think of their design sense, their elegance (at least in decades excluding the 1980’s!), and their performance embodied in cars such as the 488GTB…

Source: NYTimes.com

Or the more family friendly (2+2) California…

Source: Ferrari.com

And the most practical of all in the Ferrari line-up, the GTC4Lusso with 4 real seats and a hatchback trunk!

Source: Ferrari.com

 

Source: Ferrari.com

However, the size of the GTC4Lusso certainly starts to push the boundaries of a 2 door sports car as it pushes towards a more utilitarian segment of the market.

Source: Topgear.com “Chris Harris Drives:Ferrari GTC4Lusso

This is one long car! It is about the length of the luxury 4-door hatchback Porsche Panamera and Cayenne.

Source: MotorTrend.com

Its chassis could accommodate a 4 door, more practical shape potentially, yet still offers an incredible driving experience of the sort that Ferrari is known for. Philosophically, the company does not build cars that don’t deliver on the experience that its brand stands for and certainly it wants to remain true to this with the new model.

And yet, in order to grow its market without diluting the exclusivity behind its model line-up it needs to expand into adjacent categories and a more practical, utilitarian vehicle makes a lot of sense, especially in light of the ~40% capacity Ferrari’s factory still has available (in spite of the excess capacity, we estimate Ferrari’s return on capital to be ~100%!). In addition, traditional SUV profiles have been big sellers and profit centers for most higher end carmakers. In fact, while the 911 sports car is the iconic headline model for the Porsche brand, 2/3 of its unit sales are derived from the Cayenne and Macan SUVs. While we wouldn’t expect that high an ultimate ratio for Ferrari, a 4-d00r layout could certainly add 30-40% as it gets past its 9000 vehicle goal for 2019. With very high incremental margins on a plant that already exists today, expanding its units sales feeds its operating margins, EBITDA, and ROIC.

We believe the recent strong performance of the stock has been driven by this expectation of an expansion to Ferrari’s model line up and addressable market. While its core set of enthusiasts appreciate its 2-door sports car profile with accompanying handling, we believe that there are many (Ferrari thinks even larger contingent of potential customers) who would prefer a more practical weekend Ferrari they could drive in with their families around town, coast or the mountains in. We had observed in a previous post about Ferrari that as production figures stand today, only 2 our every 1000 people who could buy a Ferrari actually had a Ferrari available to buy and to be able to buy most new Ferrari’s you have to already own one (about 2/3 of Ferrari buyers are repeat customers)! Certainly many of these would-be buyers are not be interested in a 2 door sports car, but how many more would be in a 4-door sports car or “utility” car? The evidence suggests quite a few.

Clients of Ensemble Capital own shares of Ferrari (RACE).

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