Why Ferrari’s profitability exploded in the second quarter

We saw again in the second quarter that the Italian supercar maker Ferrari (NYSE: COURSE) unlike any other car manufacturer. Delta variant? Semiconductor shortage? Ferrari is sailing just above the storms that have hit the bottom lines of other automakers.

But even for Ferrari, its profit margin in the second quarter was exceptional. In this Motley Fool Live video, recorded on 5 August, Focus on industry Host Nick Sciple and Motley Fool senior automotive specialist John Rosevear take a closer look at Ferrari’s latest earnings report and find the secret to its super-profitable quarter was something new to Ferrari: a hybrid.

Nick Sciple: We talked Ford, General Motors, Bmw. Are there any other auto stories that may not be among these names that people follow every day that you think should be on investor radar?

John Rosevear: Well, let’s talk about Ferrari, Nick. Ferrari made a report this week, and Ferrari is interesting because it is an automobile manufacturer and it is also a luxury company. In a sense, really, his best compositions are companies like LVMH, Hermes, And so on. Companies like that. In terms of profitability and margin, these are very expensive cars. They limit the supply to ensure exclusivity and so on. They only build about 10,000 cars a year, and even that’s down from 8,000 a few years ago. But that’s accommodating the Chinese market as it has matured, and so on. Ferrari already had tremendous profitability in Q2. We are excited when GM announces an EBIT margin of 12%, when BMW announces an EBIT margin of 10, 12%. Ferrari’s was 26.5%. We’re used to seeing Ferrari’s margin in the 22%, 24% percent range. Like I said, it’s a luxury business. Twenty-six and a half is a good result even for Ferrari. But the story is not about the crisps. It’s not like you go to the Lamborghini dealership and they just come out, so you have to buy a Ferrari, that’s not how it works. All of these cars are built to order and they get enough chips. When you only build 10,000 vehicles a year, you have no problem getting chips.

The story here is that they have a new model and it’s a hybrid. This car is called the SF90 Stradale. Normally when we talk about Ferrari we are talking about the ratio between V8 engine models and V12 engine models. When you look at their profitability from an analytical point of view, the V12 engine models are more expensive, they are more exclusive, they have better margins, etc. We review this mix quarterly. The SF90 Stradale is actually a V8 model, but it is a hybrid and its price and positioning resembles that of a 12 cylinder model, which is really interesting if you are passionate about Ferrari. Anyway, the price tag, this car starts at $ 625,000. This is the first Ferrari hybrid that is not an exclusive limited edition where you have to be invited to buy one. Theoretically, anyone can walk into a Ferrari dealership and order one if they can afford it, as they say. Based on the reviews, I highly recommend taking one. It is a 1000 horsepower car that receives rave reviews from all the automotive magazines and so on. That’s what their Formula 1 drivers drive. They made it a whole video of their Formula 1 drivers, Carlos Sainz, Charles Leclerc on the track playing with these things and so on. They were both like, they’re young guys and they can drive this car. Like, wow; it’s good. What happened in the second quarter was that they started shipping this very expensive new model with great margins for which there was considerable early demand among their extremely well-heeled customer base. He was able to record the income and that drove his margins up. They warned that margins will moderate somewhat in the second half of the year, as the next new models to be released are the V8s, and that will be a disproportionate share as they ship. It’s a revised version of their Portofino convertible and Ferrari Roma, which is a new product for them. It’s elegant, smooth; what they call a gran turismo, a GT. More of a cruiser than a track car. There has been a very good demand in China. A few interesting notes about Ferrari: They took a record number of orders in June. Record month for them in terms of new orders. Their order book now stretches until next year. Interim CEO John Elkann also noted that they are seeing more and more women buying Ferraris. In China, one in five buyers is female. It is very interesting for them. They see a positive response, more women arriving, especially with Roma, the car we just talked about. It’s a good trend for them in terms of long-term backlog and so on. It’s a small matter. I know not many people follow him but it’s Ferrari, it’s cool. I’m a car guy. It is an extremely profitable and successful small business.

Scenario: Well, so I’ll give you three points to take from there. No. 1, this SF90 Stradale; Price tag of $ 625,000. We just saw the Bezos and Branson go into space. You can get a ticket for the space with Galactic Virgo for $ 250,000. It’s literally cheaper to go to space than to get this car, # 1. # 2, we are now in this world of high performance vehicles, or hybrids. You can get better performance from our hybrid than you can get from a traditional vehicle. You see Formula 1 cars are hybrids today. This is the development of it. It’s not just like you mean the environment drives your Prius, if you want the absolute pinnacle of performance, a hybrid can help you deliver that today. So also how many rich are there there? It’s amazing that there are so many people who buy these cars every year. Ferrari, if you look at the market cap, it’s a big company. When you look at the size of the company …

Rosevear: It’s a company with 3,000 employees or something like that. Ferrari is much smaller than what people think of as a real company. It’s a factory plus a little body shop, about 20 miles away, and their Formula 1 team. They are doing great, thank you.

Scenario: Just checked, market cap over $ 40 billion. This very small business is doing very well. I hope to have the opportunity to get myself an SF90 Stradale. I don’t think it’s particularly likely. But Ferrari, if you’re listening and want to take us for a test drive with John, we’ll let you know. But until then, John, I still love having you on the podcast.

Rosevear: Thanks a lot, Nick.