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15 June 2021

Stalling the Automotive Sector

If the automotive sector was in a race it would probably resemble an obstacle course. The semiconductor shortage is yet another bump in an already dangerous and uncertain road which lies ahead for the car industry. The shift towards green-energy and the electrification of transport was already tearing up the rule book for car manufacturers before COVID-19 emerged to halt production.

The clouds seemed to be parting as the global economy arose from its lockdown stillness, but the semiconductor shortage has clobbered the industry back on to its knees. Carmakers including Nissan, Toyota and Ford have closed plants due to the shortages, with the inevitable costs and lost income rising into the billions.

Carmakers around the world had been warning about the impact of shortages of semiconductors for months, and with the Chinese car industry having the first-mover advantage, they seem to have amassed a large proportion of the available stock of semiconductors. Once again, the economic centre of gravity continues to shift relentlessly towards the East.

But as with most things in life, it is not all doom-and-gloom. A strong bounce-back in new car registrations in the UK over the last month has led the Society of Motors Manufactures and Traders to raise its sales outlook for the year to 1.86 million, of which 15% are anticipated to be either pure electric cars or rechargeable hybrids. While these figures remain below the long-term average, they are unquestionably moving in the right direction. Furthermore, the latest US consumer price data witnessed the price for used cars and trucks jump by 10% in April alone. Car manufacturers/dealers are clearly willing and able to squeeze the pent-up consumer demand, aiming to recoup any lost income from the washout that was 2020.

Investors are tasked with weighing-up the contrasting forces outlined above; namely, the exciting electric-inspired road revolution, which is a magnet for capital, and the semiconductor shortage and diesel-decline.

One company which you may expect to successfully manage this crisis is Ferrari (RACE-MIL). One of the most established automobile manufactures in the world, Ferrari possesses a heritage and brand-awareness which is second-to-none. The red of Ferrari is instantly recognisable and pervades class, success, and luxury.

But there was no class in Ferrari pushing-back its 2022 financial targets for a further 12 months, blaming delayed deliveries of new models, uncertainty surrounding Formula 1 and branding. Plus, although the company plans to deliver its first electric car by 2025, it seems to be living in the past with its determination to maintain the combustion engine at the crux of its operations. The continued search for a new CEO only adds to complications.

The delaying of investments and profitability targets puts a dent in the company’s high-quality armour and the c.10% drop in the share price since the announcement illustrates shareholders’ disappointment with the news. However, the semiconductor shortage and consequential delivery and production delay perversely supports the management team’s long-term vision. There will always be a demand for Ferrari’s and the order-book is currently standing at record levels. Hence, this forced delay in production and restraint on supply only serves to enrich the extravagance and rareness of the red supercar. 

Additionally, looking at Ferrari through a quantitative lens makes far better reading; the company has an Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin and Return on Equity (ROE) which towers above rivals, while its leverage position is considerably safer than that of its competitors. Furthermore, Ferrari has posted a mesmeric 21% sales growth over the past five years; after-all, who does not want to own a Ferrari?

Clinging to its cherished history will leave Ferrari investors proud, but the market is anticipating bumps in the road with ROE expected to decline over the next two years. The launch of the Purosangue SUV in 2022 could yet be the saving grace to reinvigorate growth.

The shares are currently looking frothy and are changing hands for a monstrous 49x present earnings. Such fundamentals paint Ferrari as an outlier in the auto sector but seem more commonplace in the luxury goods sector. The business may have its head in the former, but its heart certainly lies with the latter.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
Stalling the Automotive Sector
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