When Ferrari Meets Hèrmes
It is no longer provocative to compare Ferrari to Hermes and wonder what makes hyper-luxury tick. Of late, Ferrari (€61bn market cap ) has lost its shine (-14% over last month), whereas Hermès (€221bn market cap) has kept its cool. Ferrari is somewhat cheaper now at 34x, but we are not sure that multiples are what investors are focusing on. The conventional valuation metrics appear in the following table and chart. On paper the case is clear: one should pile into Ferrari. It is less of an extraordinary financial proposition than Hermès though.
When Hermès meets Ferrari
Ferrari shares with Hermès the ability to create scarcity with talent. To be refused a superlative product and asked to stand in the queue, is probably the correct definition of hyper luxury.
The issue for hyper-luxury is how to manage a brand: develop it in reputational terms without stretching it, is what defines competent brand management in this most narrow field. Ferrari is happy to have Formula 1 as a formidable and increasingly powerful brand promoter. Hermès does not enjoy an equivalent boombox, but will have its top notch events such as the Galop Hermès. Equine events define the brand, although they are not leaping horses, à la Ferrari.
Hermès' brand management is an astounding one when measured in ROCE terms (on AlphaValue’s unified definition): investing in the brand does not tie up much capital (see last table). 60% is the ROCE magic number to be remembered. By contrast, Ferrari stalls at 33%, easily explained by the fact that wheeled boytoys need colossal R&D (opex pressure) and plant (tangible assets). Both are arresting figures. In the grander scheme of things, for the record, the average ROCE of AlphaValue coverage (ex Financials obviously) is an unimpressive 9.7% (Wacc is 8.5% for a beta of 1).
Out of this world Hermes ROCE (in pink) vs. Ferrari’s (blue)
Pundits are cognisant of this Hermès singularity. Its ROCEs are superb because they reflect internal growth, backed by continuing opex in the defence of its brand. This would be hard to replicate by anyone.
ROCE buffs may want to explore what is under the capital employed hood. This is the purpose of the following table. Both firms are not bothered by acquisitions (no goodwill worth mentioning), and run comparatively light plant (under ‘other fixed assets’).
When Hermès meets Ferrari
Ferrari shares with Hermès the ability to create scarcity with talent. To be refused a superlative product and asked to stand in the queue, is probably the correct definition of hyper luxury.
The issue for hyper-luxury is how to manage a brand: develop it in reputational terms without stretching it, is what defines competent brand management in this most narrow field. Ferrari is happy to have Formula 1 as a formidable and increasingly powerful brand promoter. Hermès does not enjoy an equivalent boombox, but will have its top notch events such as the Galop Hermès. Equine events define the brand, although they are not leaping horses, à la Ferrari.
Hermès' brand management is an astounding one when measured in ROCE terms (on AlphaValue’s unified definition): investing in the brand does not tie up much capital (see last table). 60% is the ROCE magic number to be remembered. By contrast, Ferrari stalls at 33%, easily explained by the fact that wheeled boytoys need colossal R&D (opex pressure) and plant (tangible assets). Both are arresting figures. In the grander scheme of things, for the record, the average ROCE of AlphaValue coverage (ex Financials obviously) is an unimpressive 9.7% (Wacc is 8.5% for a beta of 1).
Out of this world Hermes ROCE (in pink) vs. Ferrari’s (blue)
Pundits are cognisant of this Hermès singularity. Its ROCEs are superb because they reflect internal growth, backed by continuing opex in the defence of its brand. This would be hard to replicate by anyone.
ROCE buffs may want to explore what is under the capital employed hood. This is the purpose of the following table. Both firms are not bothered by acquisitions (no goodwill worth mentioning), and run comparatively light plant (under ‘other fixed assets’).
Subscribe to our blog
As contrarian born market participants, what would we buy into this quality universe with closed eye?
This is a testament to the new speculative pull of a putative Ukraine reconstruction, while not ever...