In my last Real Money column I waxed poetic about the opportunities in the global luxury car market and picked Volkswagen (VLKAY) as the most attractive play on that sector. The automotive industry is, by definition, a volume-driven one, and higher volume is driving profitability for the higher-end makers.
Ferrari (RACE) posted an adjusted EBITDA margin of 30.2% for the first nine months of 2017, and that has to make the folks in Detroit drool. The U.S.-based automakers do not use EBITDA as a controlling figure, but my 11-year tenure as a sell-side auto analyst enables me to do a little pencil-and-paper work and compute that Ford's (F) Automotive Segment's EBITDA margin was 16.0% in the first nine months of the year.
So, if it's nearly twice as profitable to make a luxury car, why doesn't every car maker do it?
It's all about the brand. The number of successfully created high-end automotive luxury brands in the past 25 years is one: Tesla (TSLA) . That's what Elon Musk has created, but Tesla's almost unconscionable cash burn (I think it could be as high as $8 billion for 2017) makes one wonder of it is worth it from a manufacturing perspective. Tesla reported negative EBITDA for the third quarter, and I believe will report a similar shortfall for the fourth quarter, as well.
From an equity market value perspective, of course, focusing on the high end has greatly aided Musk's net worth and has been key to attracting the numbers-blind shareholders that come out in droves in every Nasdaq bull run. With the introduction of the Model 3 -- if the company can ever produce it in any volume -- Tesla's average selling price is going to decline dramatically, however.
So, there's the rub. There's just no way that Ford and General Motors (GM) could ever reach the price point of Tesla's Model S let alone a super-high-end model like the Bentley Mulsanne or Lamborghini Aventador.
Ford sold Aston Martin to private buyers in 2007 (it is now controlled by Kuwait's Investment Dar and Italy's Investindustrial) just before selling Jaguar Land Rover to India's Tata Motors (TTM) in 2008 and Volvo to China's Geely in 2010. That two of those transactions actually occurred before the 2008-2009 financial crisis shows just how poorly Ford has been run from a strategic perspective for the past few generations. I take enough shots at the Blue Oval team in Dearborn in my Real Money columns, though, so I will not belabor that point.
Buying a niche brand requires so much effort for such a small amount of volume that it is understandable that a third-tier player like Malaysia's Proton would end up with Lotus instead of Toyota (TM) or Honda (HMC) . Also, with the tremendous amount of resources the large global players are spending on autonomous vehicles (AVs) and electrified powertrains, a simple, good old-fashioned powerplant like the one in the $425,000 Aventador -- 6.5 liter V12 generating 730 horsepower and 509 foot-pounds of torque -- could be forgotten.
So, the folks at GM can crow all they want about the lack of a steering wheel in the Cruise AV, but there is still a market for those who want to drive a car. From an investment perspective VW has the most properties and the most exposure to the fast-growing Asia regions, Ferrari is the purest play (although the folks in Maranello need to work on increasing Asian exposure to more than the current 21% of sales) and BMW (BMWYY) and Daimler have the high-end brands of Rolls-Royce and Maybach, respectively, to go with their core entry- and mid-luxury dominance.
Tesla is for the dreamers, Fiat Chrysler (FCAU) still owns Maserati and Alfa Romeo after shedding the rest of its Ferrari stake in 2015 and GM and Ford are for those who want to buy into the weird, little UFO-like vehicles that drive themselves. I'd rather drive the Aventador and I prefer to own VW shares.