On Monday, Citi revised its stance on Ferrari (NYSE:RACE) stock, downgrading the luxury automaker from Neutral to Sell. The move comes despite the firm's appreciation for Ferrari's quality and long-term growth potential. Citi's decision is primarily driven by valuation metrics, as their discounted cash flow (DCF) based target price (TP) was increased to €329 from the previous €308. The new target price, however, remains 15% below Ferrari's current share price.
The updated target price reflects modestly higher earnings estimates and reduced long-term capital expenditure assumptions. Despite the increase, Citi expressed that maintaining a Neutral rating would necessitate a positive expected total return (ETR), which would imply an almost €400 target price—a figure the firm finds difficult to justify.
Citi acknowledges the possibility that Ferrari's stock could continue to perform well in a market that favors high-quality stocks. The firm also admits the potential for inaccuracy in timing the downgrade. Nonetheless, Citi points to Ferrari's significant share price increase of 30% since December and its current trading at nearly 12 times sales and 57 times forward year 2024 estimated price-to-earnings (FY24E PE) as indicators of an overvalued stock.
The downgrade reflects a cautious approach to Ferrari's current market position, considering the stock's recent rally and high valuation multiples. Citi's analysis suggests that despite Ferrari's positive attributes, the current share price may not offer an attractive entry point for investors. The firm's revised target price of €329, although higher than before, sets a more conservative expectation for Ferrari's market performance.
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