Cars Are Back: Ferrari Leads Upwards Value Revisions

In July, Morningstar increased the fair value of 30 European companies, and downgraded 12, but it was Ferrari that had the biggest upward change

Fernando Luque 14 August, 2023 | 9:25AM
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July is the month when companies usually report their quarterly earnings. As such, Morningstar’s equity analysts are reviewing the fair value estimations for the stocks they cover.

We wrote about the fair value of UK stocks last week – today, we are looking in depth at the entire European universe. Here, our analysts have revised the fair value estimations for 42 companies between June and July. The tone is rather positive, with 30 upward revisions and 12 downward revisions.

The stock with the biggest upward change was our estimation for Ferrari (RACE), going from €190 to €257. In the second quarter, the Italian carmaker posted diluted earnings per share of €1.83, beating the FactSet consensus of €1.73 – and up €0.47 from a year earlier. Management adjusted its full-year sales forecast from €5.7 billion to €5.8 billion.

We have also revised our target price for other carmakers. For Mercedes-Benz (MBG) our fair value has been increased from €109 to €111. Meanwhile, Volkswagen (VOW3) saw its fair value increase slightly from €338 to €344 euros, and Renault’s (RNO) target price is up €1, from €86 to €87. You can read more about why many of these car manufacturers are undervalued on our site.

The reason for these upward revisions is as simple as good quarterly results. Mercedes-Benz posted second quarter earnings per share of €3.34, up from last year. Renault posted earnings per share of 7.59 euros, 5.28 euros more than last year and slightly better than expected. For Volkswagen, although second quarter earnings were below investor expectations, consolidated revenues rose 15% to €80.1 billion, beating expectations.

Luxury’s Increased Value

Moving on from cars, two of the largest French companies by market capitalisation, Hermes International (RMS) and L'Oreal (OR) have also seen their fair value revised upwards. In the case of Hermes International, the increase was 28% (from €990 to €1,270) as the company recorded strong revenue growth and improved profitability in the first half of 2023.

Our sector analyst, Jelena Sokolova, comments: "although we increase our assumptions for full-year profitability slightly, the bulk of our fair value increase comes from our reduced assumptions for the firm's cost of capital […]. We believe this better reflects Hermes’ low sensitivity to economic cycles, low operating leverage, and low financial leverage. Our fair value implies a multiple of 35 times 2023 estimated earnings, still well below the market multiple of 50 times earnings". 

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

What About Banking and Manufacturing?

In the banking sector, this month we have only increased the fair value of Dutch ING Group (ING) from €17 to €19 euros, which is equivalent to 1.5 times ING’s tangible book value in 2021, and 11 times what we estimate ING will earn in 2023.

In terms of fair value reductions, the Finnish company Kone Oyj (KNEBV), one of the world’s leading manufacturers of elevators and escalators, stands out. Its fair value falls from 56 euros to 48 euros. The analyst covering the company, Grant Slad, says: “the decline in market activity in China – the world’s largest market for new lift equipment and the most important geography for Kone – continued in the second quarter in the range of 5%-10%, according to Kone, with the pace of decline easing relative to the first three months of 2023.

"There are still no signs that recent Chinese policy measures aimed at reviving the Chinese property market will orchestrate a much-needed turnaround for the sector".

We have also cut our fair value for the Spanish renewable energy developer, Corporacion Acciona Energias Renovables (ANE) by 9%, from €35 to €32. This is due to lower electricity prices achieved in the short term.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Fernando Luque

Fernando Luque  is Senior Financial Editor at Morningstar Spain 

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