Ferrari's Rise in Value

author: FutureCar Staff    

July is typically the month when companies release their quarterly earnings reports. As a result, Morningstar's equity analysts are currently reviewing the fair value estimations for the stocks they cover.

Last week, we discussed the fair value of UK stocks. Today, we will delve into the entire European universe. During the period between June and July, our analysts revised the fair value estimations for 42 companies. The overall tone is quite positive, with 30 upward revisions and 12 downward revisions.

Among the stocks that experienced the largest upward change is Ferrari (RACE), with its estimation increasing from €190 to €257. In the second quarter, the Italian carmaker reported diluted earnings per share of €1.83, surpassing the FactSet consensus of €1.73. This also marked an increase of €0.47 compared to the previous year. Additionally, Ferrari adjusted its full-year sales forecast from €5.7 billion to €5.8 billion.

We have also revised our target price for other carmakers. Mercedes-Benz (MBG) now has a fair value of €111, up from €109. Volkswagen (VOW3) saw a slight increase in its fair value from €338 to €344 euros, while Renault's (RNO) target price rose by €1, from €86 to €87. To learn more about why many of these car manufacturers are undervalued, please visit our site.

The reason behind these upward revisions is quite simple: good quarterly results. Mercedes-Benz reported second quarter earnings per share of €3.34, an improvement from the previous year. Renault's earnings per share stood at 7.59 euros, which is 5.28 euros higher than the previous year and slightly better than expected. Although Volkswagen's second quarter earnings fell short of investor expectations, consolidated revenues rose 15% to €80.1 billion, surpassing expectations.

Moving on from cars, two of the largest French companies by market capitalisation, Hermes International (RMS) and L'Oreal (OR), have also seen their fair value revised upwards. Hermes International experienced a 28% increase, rising from €990 to €1,270, as the company achieved strong revenue growth and improved profitability in the first half of 2023.

Jelena Sokolova, our sector analyst, commented on this development, stating, "Although we have slightly increased our assumptions for full-year profitability, the majority of our fair value increase comes from our reduced assumptions for the firm's cost of capital [...]. We believe this better reflects Hermes' low sensitivity to economic cycles, low operating leverage, and low financial leverage. Our fair value implies a multiple of 35 times 2023 estimated earnings, which is still well below the market multiple of 50 times earnings."

As for L'Oreal, we have raised our fair value estimate to €376 from €336, driven by a higher annual sales growth forecast. However, this increase has been partially offset by slightly lower operating margins.

Now, let's turn our attention to the banking and manufacturing sectors. This month, we have only increased the fair value of Dutch ING Group (ING) from €17 to €19 euros. This amount is equivalent to 1.5 times ING's tangible book value in 2021 and 11 times what we estimate ING will earn in 2023.

On the other hand, we have observed fair value reductions for the Finnish company Kone Oyj (KNEBV), one of the leading manufacturers of elevators and escalators worldwide. Its fair value has fallen from 56 euros to 48 euros. Grant Slad, the analyst covering the company, explains, "The decline in market activity in China, the world's largest market for new lift equipment and the most important geography for Kone, continued in the second quarter, ranging from 5% to 10%, according to Kone. However, the pace of decline has eased compared to the first three months of 2023. There are still no signs that recent Chinese policy measures aimed at reviving the Chinese property market will orchestrate a much-needed turnaround for the sector."

We have also reduced our fair value for the Spanish renewable energy developer, Corporacion Acciona Energias Renovables (ANE), by 9%. The fair value now stands at €32, down from €35. This reduction is primarily due to lower electricity prices achieved in the short term.

FutureCar Staff