The company with the power to offer a $4 million product - and still attract a waitlist
By conventional wisdom, this company is very mature but the waitlist for this company's latest product is hundreds of people deep.
Note: This video was taped on Monday 28 October 2024.
Not every company can claim to have products that retail for a $4 million price tag that hundreds of people would sit on a waitlist for years for. But then again, there is only one Ferrari (NYSE: RACE). The Italian luxury icon has the power to control the production of its automobiles. One estimate I read was that they only make 15,000 cars a year. For context, Toyota makes 10.6 million cars a year. At the other end of the spectrum, long-time rival Porsche makes over 300,000 vehicles a year.
The demand (and dream of owning one of these cars) is so much that people who are waiting to drive one of these cars will be paying millions to drive one and could be waiting until 2026 at the earliest to ever even see the car in their garage.
As Ferrari's Australian head described it to a car magazine in a recent interview, "For something that is special and good, people are willing to wait."
For car enthusiasts, Ferrari is a sign that you've made it. But for investors like Ryan Quinn of WCM Investment Management, Ferrari's stock is an example of everything they want in a company - a growing earnings moat, a structural tailwind (people who want a luxury car this expensive don't just drop like flies in one night), and an attractive valuation. Oh, and it's also up 43% so far in 2024 and is up 200% in the last five years. That's a better result than many other stocks - local or global - over that time.
In this episode of The Pitch, Quinn uses Ferrari as an example to demonstrate WCM Investment Management's process for picking a high-quality, concentrated global equities portfolio with a growth bias.
EDITED TRANSCRIPT
Tell us about WCM Investment Management and its presence in the Australian market.
Quinn: WCM is a Laguna Beach-based money management firm. We manage just about US$95 billion in assets across multiple strategies. Here in Australia, there's exposure to our global quality growth strategy as well as our international small-cap strategy. We leverage our investment team of 24 people in Laguna Beach to scour the world for the best growth businesses we can find that are growing their competitive advantages and are supported by well-aligned, healthy cultures.
What is your team's north star?
Quinn: From a fundamental perspective, when we're doing our research on businesses, is that view of competitive advantage. Any company can have an economic moat or a moat around it, but what we care about is the directionality of the moat. The only businesses we will own are businesses where we can make the case that the moat is expanding or is on a positive trajectory.
We do that through our fundamental research, looking at high and rising returns on invested capital. margin expansion, and those types of things. That fundamental work is supported by a muscle that we think is unique to WCM, and that is our corporate culture diligence. We have a framework that we've been exercising for over 10 years that we can apply to individual companies across any industry and help take qualitative information about the business and make quantitative decisions about investing in it.
You've already spoken to moats. But I know that WCM also takes a different view on other classic investing traits like tailwinds and valuations. What's different about your approach in this regard?
Quinn: We love looking for tailwinds because we do take a long-term time horizon in any investment we make, and you can't own a business for a long time if there isn't a sustainable tailwind behind it. There are a lot of large themes in the marketplace that we'll try to get exposure to over time.
Artificial Intelligence is something that is very broadly in the news. It's frequently discussed, but really it's part of a larger sort of just tech trend - the broader acceptance and consumption of technologies. The way that we tend to get exposure to those types of trends and those tailwinds is through a picks-and-shovels manner. We're not trying to pick the individual lead stock that is going to dominate in that theme. We want to own businesses that are supportive of that theme, that benefit from that theme, and that give us the broadest chance to win as it relates to those types of environments.
As it relates to valuation, our long-term time horizon is a real advantage for us because something might have an optically high six or 12-month valuation. But if we can make the case that the durability of that earnings is going to be multi-year in nature, then when we look back on the short-term valuation, that might seem optically high. But usually over that timeframe, the earnings growth is durable enough such that the valuation lowers itself significantly over the period that we held it.
Tell us about a company that reflects this investment philosophy.
Quinn: One of our favourite businesses is Ferrari (NYSE: RACE).
This is not a car company. It's a luxury goods business. The obvious moat for Ferrari is that it's a one-of-a-kind company.
There are certainly other luxury vehicles in the marketplace that will try to compete with what Ferrari does, but there are some specific attributes to that business that we were very excited about. The first and most obvious one is they have extreme pricing power. They can just dictate whatever the price of the car they want it to be, and it will be that.
Secondly, they have significant control over supply and demand. They determine when they bring a new car out to market, they then go to a waitlist of people and let them know that that's the car they're buying. Their most recent vehicle was the F80, which has been unveiled in the last few weeks. It's their electric vehicle. They are making 799 of them, and it's going to be sold for just under $4 million apiece. If you were 800 on the waitlist, you have my condolences, but 799 people are going to get that car at just under $4 million a piece.
This brings us to another point, and that is their mix shift. Ferrari has pivoted towards the higher end of their luxury vehicles and made them more scarce and brought them out at a regular pace. That growth has been very consistent over time.
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
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Hans is one of Livewire's senior editors, specialising in global markets and economics. He is the creator and presenter of Livewire's "Signal or Noise".
Expertise
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