Ferrari’s Road to Lower Emissions May Be Bumpy
Investors may not be able to put the Italian supercar manufacturer in the same league as handbag makers Hermès and LVMH forever
The big challenge for the next boss of Ferrari RACE -4.24% will be managing the racing-car brand’s strategy for cutting tailpipe emissions.
The pandemic halted the car manufacturer’s production lines for seven weeks—with a 10% knock-on reduction in sales last year, the company reported Tuesday. Otherwise, Ferrari has cruised through the crisis with few scratches. It projects a rebound in revenue this year to roughly 13% more than its pre-pandemic 2019 total, underpinned by strong orders since last summer. The shares fell 5% in morning trading, perhaps because some investors were hoping for an even stronger outlook from a company that has routinely beat expectations in recent years.
Since its 2015 initial public offering, investors have gradually come to treat Ferrari as an exception to the general rule that car makers are capital-intensive, low-margin businesses whose shares are better suited to hedge-fund trades than long-term money. Given its small production volumes and big backlog of orders from ultrarich clients, they see the Italian company as a luxury-goods maker, not a metal basher.
But in one respect Ferrari is like other car makers: It needs to reinvent its powertrains. Environmental rules are tightening everywhere, punishing supercars, which produce disproportionate carbon emissions per mile. Consumer attitudes also are greener among younger generations that Ferrari needs to cultivate as future clients.
Former Chief Executive Louis Camilleri, who stepped down unexpectedly in December following a bad case of Covid-19, didn’t dodge the problem, investing in hybrid technology and decarbonizing production. The company delivered its first hybrid model, the SF90 Stradale, in the fourth quarter.
But his successor will need to go much further. On a call with analysts, Chairman and acting CEO John Elkann, the scion of the Agnelli family that founded the Fiat empire and still controls Ferrari, said the company would be carbon-neutral by 2030, but would still be making hybrid models as well as all-electric ones. On the CEO succession, he said only he needed the “necessary time” to find the right candidate
Investors will need much more clarity from the new boss on what carbon-neutrality means for Ferrari: what it will cost and to what extent hybrids can future-proof the company against, for example, proposed bans on combustion engines in the wealthiest global megacities. Ferrari will hold an investor day in the first half of 2022 to lay out a long-term road map, Mr. Elkann said.
Going fully electric must be a daunting prospect for a brand so known for its eight- and 12-cylinder engines and the growling noises they produce. Yet surely it isn’t impossible. Ferrari’s heritage is as much in racing and design as in engines, and consumers like high-end electric vehicles for characteristics such as rapid acceleration.
Ferrari shares currently change hands for 44 times forward earnings, somewhere between the multiples of French luxury giants LVMH Moët Hennessy Louis Vuitton SE and Hermès. But benchmarking the stock against the handbag sector may start to look like a mistake as the risks inherent in the company’s road to lower emissions become clearer. There are some automotive trends that not even Ferrari can speed past.