Which Luxury Auto Stock is a Better Buy?


Ferrari N.V. (RACE) in Maranello, Italy, is a well-known brand in the automobile industry that designs , engineers, and sells luxury performance sports cars. The company offers sports, GT, special series cars; limited edition hypercars; one-off and track cars; and Icona cars. Porsche Automobil Holding SE (POAHY) in Stuttgart, Germany, is another well-known name operating through two segments, PSE and Intelligent Transport Systems.

Rising disposable income has led to increased demand for luxury cars over the past decade. As countries emerge from the pandemic-driven recession, the demand for luxury cars should rebound quickly. The global luxury cars market is projected to reach $655 billion by the end of 2027, exhibiting a 9.3% CAGR.

Large-scale luxury car manufacturers’ heavy investments in enhancing comfort and quality should drive the industry’s growth. Both RACE and POAHY are major players in the industry with significant market share.

POAHY shares have gained 26.9% in price over the past six months, while RACE has returned 10.2%. Also, POAHY’s 44.8% gains year-to-date compare with RACE’s 5.2% slump. In terms of the past year’s performance, POAHY is the clear winner with a 65.3% gain versus RACE’s 10.9%.

But which stock is a better buy now? Let’s find out.

Latest Developments

On July 23, at POAHY’s annual general meeting, shareholders approved a proposed distribution of a €2.21 ($2.61) dividend per preference share and €2.204 ($2.60) per ordinary share for the fiscal year 2020. This corresponds to a payout of around €676 million ($798.39 million) , unchanged from the prior year.

On July 29, RACE announced that it had completed a private placement to certain U.S. institutional investors of €150 million ($176.98 million) of 0.91% senior notes due 2032. The company plans to use the net proceeds from the offering for general corporate purposes.

Recent Financial Results

RACE’s net revenues increased 81% year-over-year to €1.04 billion ($1.23 billion) in its  fiscal second quarter, ended June 30. Its net profit grew 2,188.9% from its year-ago value to €206 million ($243.05 million). The company’s EPS increased 2,675% year-over-year to €1.11 ($1.31).

For the six months ended June 30, POAHY’s revenues increased 6% year-over-year to €53 million ($62.53 million). Its earnings per ordinary share improved 844.4% from its year-ago value to €8.04 ($9.50). Its cash and cash equivalents balance rose 7.5% year-over-year to €285 million ($336.25 million).

Past and Expected Financial Performance

RACE’s revenues and net income grew at CAGRs of 5.5% and 13.1%, respectively,  over the past three years. Analysts expect RACE’s revenue to increase 4.7% in the current year and 8% in the next year. The company’s EPS is expected to grow 8.8% in the current year and 10.7% in the following year.

In comparison , POAHY’s revenues and net income grew at CAGRs of 11.1% and 17.8%, respectively, over the past three years. The company’s revenue is expected to increase 8.7% in the current year and 10.6% in the next year.

Profitability

POAHY is more profitable with a gross profit margin and net income margin of 88.29% and 4,879.28%, respectively, versus RACE’s 52.08% and 21.08%.

However, RACE’s 51.86%, 10.51%, and 15.03%, respective,  ROE, ROA, and ROTC  are greater than POAHY’s 14.52% ROE  and negative ROA and ROTC of 0.08% and 0.08%, respectively.

Valuation

In terms of forward EV/Sales, POAHY is currently trading at 222.77x, which is 96.3% higher than RACE, which is currently trading at 8.19x. However, RACE’s 40.23 trailing-12-months GAAP P/E ratio is 87.8% higher than POAHY’s 4.89.

POWR Ratings

Both RACE and POAHY have an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Both the stocks have a D grade for Value. This is justified because  RACE’s 8.19 forward EV/Sales ratio  is 429.9% higher than the 1.55 industry average, in sync with its Value grade. On the other hand, POAHY’s 222.77 forward EV/Sales multiple  is 14,308.6% higher than its industry average, consistent with its grade.

Both stocks have a C grade for Sentiment, which is in sync with their modest growth prospects over the short term.

Of the 63 stocks in the Auto & Vehicle Manufacturers industry, POAHY is ranked #36, while RACE is ranked #17.

Beyond what we’ve stated above, we have also rated stocks for Stability, Momentum, Quality, and Growth. Click here to view RACE ratings. Also, get all POAHY ratings here.

Click here to check out our Automotive Industry Report for 2021

The Winner

Both RACE and POAHY are prominent players with significant dominance in the luxury automobile market. However, the stocks are trading at extremely high valuations, which are unsustainable. Thus, it could be wise to wait for better entry points in both these stocks.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Auto & Vehicle Manufacturers industry here.


RACE shares were unchanged in after-hours trading Tuesday. Year-to-date, RACE has declined -5.28%, versus a 21.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More…

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