Aston Martin’s Ferrari-like Stock Market Valuation Looks Pricey.
“a business that is loss making on a U.S. GAAP basis, with a weak profitability record and a fragile balance sheet selling cars at much lower price points (than Ferrari), to a much less dedicated audience”
British luxury sports carmaker and part-time James Bond client Aston Martin wants investors to value it at up to 5.07 million pounds ($6.7 billion) when it floats up to 25% of its shares on the stock market next month, but this is at a high, Ferrari level and will be hard to achieve.
Aston Martin said it hopes to announce final pricing by October 3.
Investors have already questioned Aston Martin’s accounting methods, said to overstate its profitability by placing research and development expenses on the balance sheet, rather than writing them off against profits.
Bernstein Research analyst Max Warburton doesn’t buy this Ferrari-level valuation.
“(Aston Martin) is selling a business that is loss making on a U.S. GAAP (accounting) basis, with a weak profitability record and a fragile balance sheet selling cars at much lower price points (than Ferrari), to a much less dedicated audience. We love the brand. We respect the management team. But we simply can’t see how a Ferrari multiple looks realistic,” Warburton said.
Investment researcher Evercore ISI said the valuation demands a high level of confidence in Aston Martin’s management.
“Whether Aston Martin can execute remains to be seen and investors, who have had the opportunity to speak to management in recent weeks, will likely be better placed to judge than us at this stage. Clearly, the newly launched DB11 and Vantage have been well received in the press and, off a low base, generated notable sales growth. However, we continue to flag Aston Martin’s extremely high R&D capitalization rate – 95.1% vs Ferrari at 25% – which is elevating reported margins and earnings in the near-term,” Evercore ISI analyst Arndt Ellinghorst said.
Quick to cash in
Aston Martin has been quick to seek to cash in on its recent return to profitability. In 2017 it made its first profit since 2010. It has also gone bankrupt 7 times since its birth in 1913.
Aston Martin is owned 37.5% by Italian private equity firm Investindustrial, along with Kuwaiti companies Investment Dar and Adeem Investment. Daimler has a 5% stake.
Aston Martin said in the first half of 2018 sales rose 14% to 445 million pounds ($574 million) while adjusted EBITDA (earnings before interest, tax, depreciation and amortization) advanced to 106 million pounds ($137 million) from 93 million ($120 million) in the same period last year. The latest figures represent an EBITDA profit margin of 24%, according to Aston Martin.
Moody’s Investors Service, in a report earlier this month, said it expects a significant improvement in Aston Martin’s financial metrics this year, because of the strong order book for the DB11 and the launch of the new Vantage late last year.
Moody’s points to several negatives though
- Limited financial strength compared with some of its direct competitors like Porsche, Bentley and Audi.
- Narrow product line.
- Exposed to foreign exchange risk – based in Britain but generates revenues in mainland Europe, after Brexit, the U.S. and Asia.
- Highly leveraged capital structure reflecting a high debt load and historically weak profitability.
But it liked
- Strong brand name, thanks in part to its link with the mythical spy James bond, 007.
- Good geographic diversification and flexible cost structure.
- Technical partnership with Daimler.
Aston Martin is expected to lead a string of stock market flotations which could include Porsche, and Alfa Romeo-Maserati. Aston Martin has plans for hybrid and electric models to meet more stringent emissions rules including the revival of the Lagonda name plate for an electric luxury brand. The Lagonda electric SUV will arrive in 2021.
Volvo recently withdrew its flotation plan, when investors reckoned it was asking too high a price.
Aston Martin’s biggest market is the U.K. with about 30% of its sales, followed by the U.S. with 25% and Asia Pacific (16%).
Bernstein Research’s Warburton said Aston Martin is no Ferrari.
“Ferrari is genuinely unique. There are no other credible examples of a sub 20,000 unit (manufacturer) that have any consistent profit record. Even low volume premium brands under the protective wings of (big carmakers), such as Bentley (VW) and Lamborghini (VW’s Audi), struggle with profitability. Aston’s price points and gross margins are nowhere near Ferrari’s, yet it has a cost base that’s very similar,” Warburton said.