2 Eye-Popping Graphs Showing Why Ferrari Is a Major Long-term Buy

Ferrari (RACE 0.34%) not only produces some of the most recognizable race cars and main street vehicles, but its history with Formula One driving performance is impeccable. Perhaps even more wild is that Ferrari, as an investment, may have outperformed its impressive racing machines on the track.

Since Ferrari’s 2015 IPO, the stock has soared a staggering 773%, far outpacing the S&P 500‘s 229% gain. But Ferrari is a unique automaker with a rare economic moat in an ultra-competitive and capital-intensive industry, and it’s important for investors to see the next two graphs to better understand just how dominant a business Ferrari is.

Image source: Ferarri.

Cash flow to sales ratio

Operating cash flow (OCF) to sales is a financial ratio measuring a company’s ability to convert each dollar of sales into cash. The formula is a simple one: divide its operating cash flow by its net sales.

Data by YCharts.

A higher ratio indicates a greater efficiency in generating cash from sales. But companies are set up differently, so it’s just as important, or perhaps more so, to compare how the ratio changes over time rather than only comparing it to rivals — both are important.

In this case, as you can see in the graph above, Ferrari more than doubles many competitors with its operating cash flow-to-sales ratio, but it also has consistently driven the metric higher over the past three years while competitors have stagnated or declined.

What the ratio also shows investors is a picture of its basic financial health: A higher ratio indicates a company’s ability to not only pay its short-term obligations, but invest in growth without relying on external funding, raising too much debt, or diluting shareholders.

Return on invested capital

Another brilliant tool for investors to have in their back pocket is return on invested capital, or ROIC. It’s a financial metric that measures how efficiently a company uses its capital to generate profits — anywhere from a money pit to a cash printing machine.

Data by YCharts.

Essentially, the higher the ROIC, the more effective the company is at creating value for investors. The metric can also help determine if a company’s growth strategy is firing on all cylinders and deserves a premium valuation compared to its rivals.

In this case, Ferrari has long been rewarded a premium valuation — Ferrari currently trades at a price-to-earnings ratio of 46 times, compared to the industry average of roughly 17 times — as it operates more like an ultra-luxury stock than a traditional lower-margin automaker. It’s also worth pointing out again that Ferrari’s already-impressive ROIC continues to move consistently higher.

What it all means

By simply looking at two metrics, you can already understand that Ferrari does a lot of things right from top to bottom. Ferrari’s brand image embodies exclusivity, Formula One driving technology and performance, and, of course, some Italian flair.

Ferrari owns a rare economic moat in the automotive industry, evidenced by its brand, vastly superior margins, high and sustainable pricing — Ferrari’s soon-to-be-launched F80 will carry a price tag of nearly $4 million — industry-leading residual values, and high customer loyalty rates.

Ferrari’s impressive racing heritage is matched only by its financial success, and there’s no reason to believe Ferrari’s business strategy will be any less effective moving forward. It’s arguably the best automotive stock out there and can be a cornerstone in portfolios.