Ferrari's Rise in Value

author: FutureCar Staff    

July is typically the month when companies release their quarterly earnings reports. Morningstar's equity analysts are currently reviewing the fair value estimations for the stocks they cover. Last week, they focused on the fair value of UK stocks, and now they are delving into the entire European universe. During the months of June and July, the analysts made revisions to the fair value estimations of 42 companies. Overall, the tone is positive, with 30 upward revisions and 12 downward revisions.

One notable stock with a significant upward change in fair value estimation is Ferrari (RACE), which increased from €190 to €257. In the second quarter, the Italian carmaker exceeded expectations by reporting diluted earnings per share of €1.83, compared to the FactSet consensus of €1.73. This represents an increase of €0.47 from the previous year. Ferrari's management also adjusted their full-year sales forecast from €5.7 billion to €5.8 billion.

In addition to Ferrari, Morningstar has revised the target prices for other carmakers. Mercedes-Benz (MBG) saw its fair value increase from €109 to €111. Volkswagen (VOW3) experienced a slight increase from €338 to €344 euros, while Renault's (RNO) target price went up by €1, from €86 to €87. To learn more about why many of these car manufacturers are undervalued, visit Morningstar's website.

The reason behind these upward revisions is simply the companies' strong quarterly results. Mercedes-Benz reported second quarter earnings per share of €3.34, showing growth from the previous year. Renault posted earnings per share of 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 away from the automotive industry, two of the largest French companies, Hermes International (RMS) and L'Oreal (OR), have also seen their fair value estimations increase. Hermes International's fair value rose by 28%, from €990 to €1,270, due to strong revenue growth and improved profitability in the first half of 2023. Jelena Sokolova, the sector analyst, explains that the increase in fair value is primarily driven by reduced assumptions for the firm's cost of capital. This change reflects Hermes' resilience to economic cycles, low operating leverage, and low financial leverage. The fair value implies a multiple of 35 times the estimated earnings for 2023, which is still below the market multiple of 50 times earnings.

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

In the banking sector, Morningstar has only increased the fair value of Dutch ING Group (ING) from €17 to €19 euros. This valuation is equivalent to 1.5 times ING's tangible book value in 2021 and 11 times the estimated earnings for 2023.

On the other hand, there have been fair value reductions for some companies. Kone Oyj (KNEBV), a leading manufacturer of elevators and escalators, has seen its fair value decrease from 56 euros to 48 euros. Grant Slad, the analyst covering the company, attributes this decline to the ongoing market activity slowdown in China, which is the largest market for new lift equipment and a crucial geography for Kone. Although there are no signs of a turnaround in the sector due to recent Chinese policy measures aimed at reviving the Chinese property market.

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

FutureCar Staff