Coming Signals Auto Sector Mega Merger

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Chrysler Automobiles (:FCAU) plans on taking its icon maker Ferrari public in a IPO on the NYSE in October. The company sees a lot of value in Ferrari and is offering just 10% of its 90% stake in the IPO.

The other 10% is owned by Piero Ferrari, Son of founder Enzo Ferrari, who is not selling his stake.

With such a small piece of Ferrari be ingoffered to the public sometime in late-October, many investors are excited about owning a piece of the iconic supercar maker and the World’s #1 brand.

There are some things potential investors should know before buying in Ferrari.

Below are 4 things to consider before putting your hand up for a stake in the Ferrari IPO, as follows;

1. The high price of Ferrari shares: Ferrari shares will be sold at a premium, so investors can buy Fiat Chrysler Automobiles shares instead. The Ferrari IPO is expected to be 1 of the most publicized IPOs of the year, but only a small percentage of the company is being offered to the public. With only the 10% being included in the IPO, 80% ownership in Ferrari will be distributed among Fiat Chrysler Automobiles’ shareholders. With such a small percentage of the company expected to be sold on the open market, shares will demand a high premium as demand outpaces supply. Many Ferrari lovers will be after shares in the company.

This means investors who are still interested in Ferrari should look for other ways to benefit from the IPO. By owning shares of Fiat Chrysler Automobiles, for example, investors can receive financial gains from the future successes of Ferrari.

For this strategy, the earlier the better, as Fiat Chrysler Automobiles had a price increase of 15% following the IPO announcement, but has fallen back in this market correction.

Symbol Last Trade Date Change Open High Low Volume
NYSE:FCAU 13.21 30 Sept–2015 1.00 12.85 13.23 12.83 6,435,387
Analysis for FCAU: Overall Short Intermediate Long
Bearish (-0.33) Bearish (-0.35) Bearish (-0.31) Bearish (-0.34)

2. The profitability of Ferrari as a automaker is not clear: when it comes to operating profit margins, it is possible that Ferrari will become the most successful auto company in the world. But, its annual sales volumes are tiny compared to other automakers, and there is no plan to increase volume. The automaker caps the yearly supply of Ferraris to make the car very exclusive. Adding to the cloudy future of Ferrari is its strategy to restrict supply works, making the automaker very successful. In Y 2014, it had a 14% earnings before interest and tax (EBIT) margin, well ahead of its competitors. With prices high, this could be a signal there is not much room for growth.

 

3. Ferrari may not have a growth plan: Fiat Chrysler CEO Sergio Marchionne has leaked information that Ferrari is looking at the possibility of expanding its sales to an additional 10,000 a year without compromising its exclusivity. But, this is a very small amount of growth and shows that volume growth might not be in the cards for Ferrari.

When it comes to prices, it is possible,  though unlikely, that low supply and high demand will allow the company to increase prices over time. In theory, an increase in price reflects an increase in profits, Ferrari runs the risk of pricing some consumers out of the market.

The only other growth prospect for Ferrari is through its Limited Edition (LE) products such as its $1.4-M LaFerrari. Products such as these have the ability to increase profits, of course part of the allure is exclusivity, constricting the ability for LE products to increase growth. Ferrari is very successful with this marketing strategy. and there is licensing of the Ferrari mark to a myriad of supercar related products, which the company does now to some extent.

 

4. The Ferrari IPO may be a signal for a mega merger: Fiat Chrysler Automobiles has faced fierce competition from large-scale competitors such as Toyota (NYSE:TM) and Volkswagen (OTCMKT:VLKAY). This competition has caused the automaker to require large amounts of cash flow and cash reserves, prompting the Ferrari IPO itself.

The IPO is expected to raise between $400 to $600-M, depending on the premium, but that cash will be used to compete quickly. This means the company might look to merge with another large auto manufacturer such as General Motors (NYSE:GM), talk have been rumored.

Stay tuned…

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