MILAN - Ferrari faces a battle to persuade investors that it should be priced as a high-flying luxury goods stock, given a carmaker's margins and the heavy investment required to make its prancing horse logo a big attraction on other exclusive lines.
Few would question the business acumen of Sergio Marchionne, redoubtable chief executive of Fiat Chrysler Automobiles (FCA) , but his strategy for squeezing every last drop of value from the listing of the group's illustrious Italian sports car brand has certainly raised a few eyebrows.
"Ferrari is capable of being a fully-fledged luxury brand,"Marchionne declared last month, setting his stall out to target the kind of high-end valuation multiples enjoyed by the likes of LVMH and Richemont.
The 62-year-old said Ferrari is worth up to 10 billion euros (S$15.2 billion), eyeing an initial public offering (IPO) slated for the first half of this year and hoping for a chunky windfall to boost FCA's own ambitious five-year investment plan.
But for all Ferrari's Formula One racing pedigree, exclusivity exemplified by the LaFerrari supercar's 1 million euro price tag and a production cap that maintains a healthy customer waiting list, the company has its work cut out if it is to join a sector that trades at about 20 times future earnings. That's more than double the average for carmakers.
It has to be acknowledged that Ferrari is no laggard in the money-making stakes, with profit nearly tripling over the past decade and its margins of 14 per cent unmatched by any carmaker bar Porsche.
But those margins are well below Prada's 26 per cent and have been under pressure from rising costs.
Revenue growth has been more gentle than that of most European luxury stocks and its capital expenditure and research and development requirements are more than double, depressing its return on capital.
SHORT ON DETAIL
While the multiples investors will pay depend on Ferrari's ability to grow, it is hard to see what the company has beyond its cars that would fit the luxury mould.
Ferrari has the capacity to raise annual production to 10,000 vehicles a year from 7,000, but Marchionne has made clear that output will be kept below demand to protect the brand's exclusivity and told analysts in a post-results conference call last month that further detail on his strategy would not be forthcoming until nearer the IPO.
Ferrari's merchandising division might seem an obvious starting point, but Marchionne has denied this. In any case, the elevated prices of T-shirts, bags and shoes bearing the prancing horse are well below those commanded by luxury goods.
Its theme park in Abu Dhabi is also accessible to anyone willing to fork out 250 dirham ($70) for a one-day pass.
"If you're already available to everyone, then making your way back up to the luxury level is nearly impossible," said Manfred Abraham at brand-building consultancy BrandCap.
"They would have to stop doing a lot of things and start again, which is a massive investment ... how attractive is that to shareholders?"
Investors have also been left scratching their heads over Marchionne's statement that carmaking, which accounts for the bulk of sales and profit, is "incidental" to Ferrari.
As shown by Porsche Design, tyre maker Pirelli's PZero and Bugatti's move into apparel, previous attempts by automotive groups to stretch beyond their core products have not provided a major revenue boost.
Then there's the Ferrari logo and colours, which analysts have said make it a difficult sell in the fashion and design world.
There was talk of a luxury alliance with other opulent Italian brands to rival conglomerates such as Kering, but the concept has been dismissed by two bankers close to the company.
Analysts, meanwhile, have pointed to the potential for exclusive clubs and hotels for the super-rich or Ferrari moving into high-value motorcycles and boats.
However, Bernstein analyst Max Warburton remains sceptical, suggesting that the Ferrari brand could be extended at a luxury premium only to watches, perfumes and eyewear.
"A sports car maker has little competitive advantage when it comes to producing and selling personal luxury goods," he said.
Regardless of its prospects as a true luxury goods business, the spinning off of Ferrari is far from a car crash.
The divorce will unlock the value of a business that made 12 per cent of FCA's profit last year. It could also pave the way for FCA to attempt a tie-up with another carmaker, perhaps focusing on the Asian market, bankers have said.
Yet how investors interpret Marchionne's bold statements remains unclear, with analysts' estimates for Ferrari's worth ranging anywhere between 5 billion euros and 10 billion euros.
"With luxury it's a lot about emotion and allure," one US investment banker said. "People may not fully buy into Marchionne's argument, but they will put money on Ferrari on the promise of what it represents and could be."