One company that has always stood out to me as being the perfect acquisition for Warren Buffett (Trades, Portfolio) is Ferrari NV (RACE, Financial).
When looking at this company, it is immediately clear it ticks some of Buffett's boxes. Most importantly, the business has a huge moat that is both wide and deep. Its brand is virtually priceless and, much like Coca-Cola (KO, Financial), which has carefully curated its image to be associated with fun and good times, Ferrari is a brand built on style, quality and Italian racing pedigree.
While I do not believe Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) would seriously pursue the European car company, I thought it would be fun to explore its acquisiton potential.Ă‚
Buffett's criteria
As mentioned previously, the Ferrari brand is without a doubt the company's most important asset.
The first major sticking point I see that would prevent a Buffett deal here is the fact Ferrari has to spend to maintain its moat. The company has to invest in technology to make sure it remains ahead of its competitors and the automotive technology it uses is reliable. If not, the company's reputation could take a severe hit overnight.
That being said, you could also argue the business does not need to invest massive amounts of money. Only last month, a 1962 Ferrari 250 GTO sold for $48.4 million at auction, breaking the previous record for a classic car sold at auction. At this price, the buyer is not buying for reliability, they are buying for the brand name, the history and the object.
But that's enough about what I think, what is Buffett looking for in a business?
"Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone."
I don't believe Ferrari truly meets any of these criteria. As Buffett has few positions in auto companies and has never owned a flash car, it is unlikely he would consider the Ferrari business to be one he understands (although the same could be said forApple (AAPL, Financial); his buying here shows he is able to learn about new businesses).
When it comes to favorable economics, I think this is the one point where Ferrari looks acceptable. After going public in 2014, the company has increased its return on capital employed ratio from 14% to 26% for 2017. For some comparison, Coca-Cola's return on capital employed was 16% last year. Both companies have operating margins in the mid-20s.
Ferrari did have "able and trustworthy management" under the stewardship of Sergio Marchionne until he passed away in July. Marchionne presided over the spinoff of the company from Fiat Crysler (FCAU, Financial) and had set out a plan to dramatically increase growth over the next several years. It remains to be seen if the new CEO can follow in his footsteps.
On the final point, "a sensible price tag," I'm reasonably certain Ferrari would not qualify for a Berkshire acquisition. Even though Buffett has proven he is willing to pay more for good companies in the past, the stock is trading at more than 30 times earnings and an EV/EBITDA ratio of more than 26. Whether or not you consider this to be expensive depends on your assessment of the value of the Ferrari brand name.
Something to consider is the company reported at the end of its last financial period 4 billion euros ($4.6 billion) in net assets. It is estimated the Ferrari brand alone is worth $6 billion, which excludes all of the valuable intellectual property the company has accumulated over the last several decades.
So, depending on your knowledge of the company and the auto industry, this business could be undervalued based on its assets rather than earnings. Of course, as this is not an industry Buffett understands, it is unlikely he will view the company in that way. So put simply, it is unlikely Berkshire will buy Ferrari.
Disclosure: The author owns Berkshire Hathaway and Exor (MIL:EXO, Financial), the majority shareholder of Ferrari.
