I like the Aston Martin DB9. I have not always been a fan of Aston Martin (LSE:AML) shares. I have written publically that I was bearish on the Aston Martin share price four times in under two years. I think it is about time I took another look at Aston Martin to see if I should change my mind on its share price prospects.
A bad third-quarter of 2019 for Aston Martin
My first look at Aston Martin was after it had reported a £10.1m loss in the third quarter of 2019. That brought the loss for the first nine months of the 2019 fiscal year to £72.9m.Although growth in the US and China was positive, Aston did not sell many cars there. So, Aston sold fewer cars overall year-on-year. Yet, Aston Martin’s operating margin was 13.4%, which bettered many car manufacturers. To swing the company into profit, more Aston’s needed to be sold. Indeed the plan was to ramp up sales to around 14,000.
But, I thought Aston Martin was in a tricky spot. It is not Ferrari who made an average operating profit of £71,000 on the 10,000 cars it sold. Aston Martin was not like Porsche either. Porsche sold 300,000 or so in 2019. Porsche is part of Volkswagen and benefits from spreading development costs across the group.
Porches operating margin was around 17% in 2019, and Ferraris was almost 24%. I don’t think Aston has the type of, shall we say, economically insensitive customers that Ferrari has that enables it to charge huge mark-ups and sell so few cars profitably. Aston Martin probably did not have the economies of scale like Porche had had to sell hundreds of thousands of cars at high margins. Yet, I was eager to see how a real push into China and the US and the SUV market with the DBX would play out.
Smokescreen
Aston Martin went public in October 2018. The preliminary half-year results for the 2018 fiscal year, included in the IPO prospectus, showed real promise. Sales were convincingly higher year in year, and adjusted profit growth was robust.
That made it hard for investors to swallow the results in 2019. What might have been more concerning was the suggestion that the company had engaged in channel stuffing. Receivables had jumped massively in 2018. This could have been a sign that many more cars than usual had been shipped to dealers, plumping up Aston Martin’s sales numbers. If that is true, then by the time 2019 rolled around, dealers could have been still working off their inventory and would have ordered fewer cars, leading to a revenue drop.
A billionaire to the rescue
The news flow around Aston Martin from December 2019 into the new year was dominated by speculation of Canadian retail billionaire and racing team owner, Lawrence Stroll, leading a takeover attempt. There were also profit warnings, but shareholders seemed excited about Mr Stroll’s involvement, and I could understand why.
Mr Stroll could have associated Aston Martin with his Racing Point F1 team, boosting its performance car credentials. Ferrari and Mercedes have certainly benefited from such a relationship. Also, Mr Stroll made his money by following in his father’s high fashion footsteps. He seemed well suited to building Aston Martins luxury car reputation.
The takeover did happen in 2020. Other bidders, including Chinese carmaker Geely, had been involved, but Mr Stroll’s offer won out towards the end of January 2020. The Financial Times reported that Mr Stroll’s consortium injected £182m for a 16.7% stake, with £318m coming from a rights issue backed by Aston Martin’s largest shareholders.
Avoiding the Aston Martin crash
I last looked at Aston Martin in early February 2020. At the time, I said I would not buy shares in the company. Aston Martin Shares continued to slide in February and then fell off the cliff in March 2020 during the coronavirus market crash.
I am comfortable saying I was right to avoid Aston Shares initially. I cannot be as confident in my decision to avoid them after the takeover. The Aston Martin share price did crash, but that was a wide market event. Since the crash, the share price has risen by 50%. It’s still below where it was when I said I would avoid it, but I cannot claim a predictive victory.
Mr Stroll does seem to have a vision for where Aston Martin should be going. Investors seem to be buying into it. Perhaps without the pandemic, the Aston Martin share price would be sitting above where it was when the takeover was announced.
The road ahead for Aston Martin
Aston Martin is still standing after the worst of the coronavirus pandemic. Mr Stroll is now pushing ahead with his plans. Aston Martin is delaying the release of its planned electric supercar to 2025 and will instead develop a V6 hybrid engine in the near term. The Racing Point F1 team was rebranded the Aston Martin F1 team in 2021, marking the return of the Aston Martin name to formula one for the first time since 1960.
Aston Martin has raised a lot of funds. I think the fear of depleting them quickly and raising more may explain the pushback of the electric vehicle. It’s an entirely new platform for them, and development costs would be huge. The hybrid V6 engine would be less costly to develop and is the most powerful engine Aston Martin has ever made.
The DBX SUV has finally entered production and is selling well, albeit in small volumes in China. The company is now forecasting it will sell 6,000 cars with mid-teen operating margins in 2021. That would be right back where it was in 2019. And on the one hand, it is still competing with Ferrari, and on the other, Porsche, despite not being like either.
Aston Martin shares traded at 19,000p around the time of the IPO. They are now worth around 760p. If the company does really start to turn the corner, there is plenty of time for me to get on board. As for now, I am not tempted to buy Aston Martin shares.
DISCLAIMER: James J. McCombie does not own shares in Aston Martin. The Storied Investor has no beneficial position in Aston Martin
The Storied Investor 