Aston Martin reported their Q3 2021 results last Wednesday. They were broadly in line with expectation and the stock finished up just under 2% on the day which appears positive at first glance until you consider that Aston Martin’s stock is down 20% in the last 3 months. Aston Martin indicated that they are on track to deliver their full year targets despite subtly revising a few key numbers downward. Listening to the earning’s call raised a number of questions. What do the Q3 and YTD numbers really tell us?
Are the full year targets still achievable? Is the DBX the success it is being touted as? What has happened to the Sport & GT series cars? Will the long-suffering depositors be getting their Valkyries shortly?
The earnings call did provided a delightful basket of additional insights. As per the last several calls, it was just the CEO, Tobias Moers & the new CFO Kenneth Gregor on the earning’s call. Moers came across as having all the enthusiasm of a man who was about to have to tell his children he just ran over the beloved family dog. The Executive Chairman, Lawrence Stroll, was nowhere to be found. Stroll has been on a PR tear lately giving a plethora of interviews. However, he seems to have a distinct preference for the fawning auto press vs. having to face what could be awkward questions from financial analysis on Aston Martin’s cash flow and crippling debt load. It was actually quite wise of him not to show up at this earnings call as for the first time, the analysis started asking more pointed questions and it wasn’t just the usual exercise in fluffy soft toss that past earnings call have been.
The results Aston Martin presented all use the YTD 2020 as the main point of reference and show enormous improvement. While that presents a nice fuzzy feel-good story, it’s the equivalent of comparing Churchill’s backbone to Chamberlain’s. It just isn’t really that relevant to understanding the current health and trajectory of the business today. As such, what is relevant when looking at Aston Martin’s results is how they were doing both pre pandemic and over the last several quarters.
Free Cash Flow
This now tells quite the story. Just based on car sales and revenue, its looks like Aston Martin a year and a half into the Stroll regime looks almost exactly like Aston Martin in the late Andy Palmer era, just less profitable. Operating Profit, Free Cash Flow, and Revenue are all still heading in the wrong direction. In Q3 2021, Aston Martin put up its lowest Revenue number in the past 4 quarters. Stroll & Moers have been pitching this majestic recovery story, but the hard truth is, the business is not growing. Today Aston Martin is still consuming vast amounts of cash, increasing its debt load, with profitability nowhere near in sight. Perhaps my favorite attempt at misdirection in the earnings announcement was the comment on the improved Free Cash Flow of £5 mil. Buried in the fine print, Aston did admit they made no interest payments in Q3. If they had this number would have been very negative. When you consider Aston pulled in £38 mil. of new customer deposits in Q3 this just means you’ve likely burned through £33 mil. of what was brought in. I do hope that all of the recent depositors are aware that they are basically floating Aston Martin an unsecured multi year interest free loan. For the originally Valkyrie depositors, the reality is they have lost 6 years of income on those funds which at a 5%-6% rate of return roughly equates to $400k.
Unpacking the numbers in a bit more detail, Aston Martin is considerably behind the pace they need to deliver the 6,000 units called for in the current 2021 guidance. The YTD, Aston has wholesaled 4,250 cars which on a straight line basis equates to 5,667 cars. To hit the guidance number, Aston needs to ship 1,750 units in Q4. While they did ship 1,839 cars in Q4 2020, that number included dealer pipeline fill of 578 DBXs. Back those out and it wasn’t even close. Moers has continuously stated that Retail sales were ahead of Wholesales shipments without providing any numbers to back up the claim. Given how weak the Q3 wholesale numbers were, it actually would have added a bit of credibility and confidence in Aston’s story if Moers had shown a Retail number that was higher as it would have indicated stronger consumer demand than the YTD Wholesale number would lead one to suspect.
Aston Martin’s current 2021 guidance is:
Original 2021 Guidance
Revised 2021 Guidance
Estimated 2021 Results based on YTD run rate
Very Low Teens
Depreciation & Amortization
£225-235 mil. (re-phased into 2022)
Capex & R&D
£215-235 mil. (re-phased into 2022)
The guidance does not include either a revenue target, which will likely be around £1 billion, or a profit (loss) target which is likely to land in the -£240 mil. range after the reductions in D&A & Capex. Both are concerning as while reducing D&A can be a bit of financial engineering to make the bottom line look a lot better, cutting Capex on a portfolio that even the CEO admits is “overaged” is very hard to explain. In addition, it’s impossible to make money when EBITDA doesn’t cover your interest expense. In fact, the road to profitability is questionable even if Aston delivers against Stroll’s 2024/2025 target of £2 billion of revenue. To get to profitability under its current debt load, Aston will need to at least double its current EBITDA margin while holding Depreciation and Amortization and other expenses at current levels which would take a minor miracle to happen. This is a tall ask as Aston Martin is sitting with £1.3 billion (and growing) in intangible assets on the balance sheet which will need to be amortized over the coming years. Moers even admitted in the 1st half earnings call that they will likely need to accelerate the write down for the planned model refresh and move to Mercedes supplied technology & powertrains in 2023. How they are going to be able to afford to do so is a major unanswered question. In fact, if you take a step back and try to evaluate the true value of Aston Martin today, you have a car company with a market value of £2 billion, which sells £1 billion of cars annually at a loss of £240 million, and has issued debt with a fair market value of £1.36 billion. Given the debt load, “junk” rating on most of the debt, huge losses, and lack of growth, it’s hard to justify even the current recently depressed stock price. In fact, if the stock drops another 25% it will fall below the price Stroll guaranteed Mercedes Benz when he gifted them 20% of Aston Martin as part of the strategic technology agreement signed in Q3 2020.
Looking at the DBX sales in a bit more depth, YTD 2021 Aston has wholesaled 2,186 DBXs. This breaks down into 746 DBXs in Q1 followed by 849 in Q2 & 591 in Q3. The straight line of 2,915 again is short of Moers’ modest stated goal of shipping 3,000 DBX’s in 2021 (the original Palmer target was 6,000 units). Adding the 578 DBXs left over from Q4 with the 2,186 sold in the YTD 2021 totals 2,764 DBX’s floating through the Aston Martin retail network through 3 quarters of 2021. Just checking the number of DBXs listed for sale at Aston Martin dealers in North America, it is currently 134 (as a reference there are 22 new Bentley Bentaygas listed). Most high dealers I know only list 1/2 to 2/3rds of their new car inventory on the website so conservatively there are around 200 DBX’s sitting in dealer lots in the US as of the end of Q3. With North America representing 34% of Aston’s global sales, this projects to 600 DBXs for sale globally right now which neatly matches the retail inventory carry over from 2020. The good news is it does look like Aston is matching supply to demand. The bad news is demand is falling short of the even the current quite modest goal. This has to be extremely concerning to Stroll and Moers given the DBX is supposed to be Aston’s hot new thing, and the new car market has been on fire. Add in that Aston Martin built a new factory to produce the DBX that’s running at less than 40% of capacity and the DBX is starting to look like a financial dumpster fire. As a sign that they really aren’t selling near expectations, I keep getting increasingly generous offers from different dealers just to come and test drive one. 2021 was the year Aston really needed to get the DBX off the ground as the Ferrari SUV arrives next year.
Sport & GT
With DBX already accounting for over 50% of the cars sold in the first three quarters of 2021, its fast becoming the core of the Aston Martin business. This is helping to mask the utter collapse of the Sport & GT car sales which through 2019 were 95% of Astons sales, represent its core and heritage. The Aston brand was built around the beautifully designed front engine GT. James Bond drives a DBS or a DB5, not a DBX designed for the school run. In Q’s 1-3 of 2021, Aston sold 2,002 Sport & GT cars. This is effectively half the number Aston Martin sold in the same period in 2019. Net net, sales of the Sport & GTs are now running at about half the level they were pre pandemic and this is unlikely to change anytime soon. In a shocking bit of honesty on the earnings call, Moer’s actually stated that the Sports & GT cars were doing better than he thought they would, before tacking on that the current Sport & GT models are “overage”. This just shows how weak the core Sports/GT business is perceived to be internally. Moers also stated that Aston has an order bank for the next 6-8 months for these models which he considered very reasonable as customers do not want to wait longer for these types of cars. It’s a questionable point of view considering customers don’t seem to have an issue waiting 18-24 months for similar type Ferrari. Despite the Sport & GT business melting down faster than Prince Andrew’s reputation, a facelift for the existing models now will not be arriving until 2023. Stoll originally promised it for Q3 2021 a year ago. What happened to those plans is not clear, but it is consistent with Astons delivering major projects years after they were originally due.
Looking at a few other areas of interest in a bit more detail:
Assuming Valkyrie construction has officially started, there’s still no evidence that the car actually works properly. The last it was publicly seen was at the Goodwood Festival of Speed back in July. Here’s what was supposed to happen at Goodwood:
And this is what transpired:
Aston had planned for the Valkyrie to complete 11 runs over the 4 days. The final count was less than half that number. On Thursday, the Valkyrie did complete a run on the Hillclimb but a close look at the video seemed to indicate that the active aero had been turned off, the car was quite skittish, and not particularly quick. Inboard video footage that Aston posted indicated that the check engine light was on, the active aero was off and so were all the ECS systems. This is very much in line with information I have gathered that Aston Martin was having major difficulties getting the Valkyrie to run properly. If the situation was bad on Thursday, it got worse on Friday when the Valkyrie broke down on the hill (apparently with the influencer Shmee as a passenger in the car) resulting in a red flagging of the session and Lawrence Stroll (Aston Martin CEO) cancelling his appearance at the last minute. This was actually the second time the Valkyrie had broken down at Goodwood. Post the Valkyrie’s Friday fiasco, Lance Stroll’s Saturday appearance was quietly cancelled, and Tobias Moers suddenly showed up to drive the car. While Moers did successful get the Valkyrie up the hill fairly slowly on Saturday, it broken down again on its way back to the paddock.
According to a few ex Aston Martin employees, Stroll/Moers have taken all the cost they can out of the Valkyrie and that Multimatic has had massive problems getting the electronics to work properly in the road cars. Adrian Newey and Redbull are no longer involved at all with the project and haven’t been for quite some time. The chief test driver for the Valkyrie apparently hasn’t driven it since Goodwood so its highly questionable if Aston/Multimatic have actually solved the reliability issues. Last I heard, neither Valkyrie variant had passed the crash tests yet. Given the above, my guess is the Valkyries that Moers has stated will be delivered this year will be going to “close friends and family” who will keep any issues quiet.
However, when a question came up about the relationship between the two during the Q3 earning call, this time Moers was spectacularly transparent and honest about it. He stated: “Totally two separate legal entity, a private-owned company doing the racing business, and the PLC, which is a totally different company with a different ownership.” This is hugely different from the image Stroll was spinning when he was interviewed for the F1: Beyond the Grid podcast back in October. In the interview its quite clear that Stroll doesn’t differentiate between the race and road car company and is putting his own vision and interests first. He explicitly states that Aston Martin Racing was able to sign “hundreds and hundreds of millions of dollars of sponsorship” off the back of the name change from Racing Point to Aston Martin Racing. If this was the case, Stroll just gifted (along with a check for of £24 million) the AMLs most valuable asset, the Aston Martin brand, to his private company and then raised hundreds of millions off the back of having the rights to use the brand to fund his racing team. If AMR was truly able to raise those sorts of funds just off a name change, then why isn’t AMR paying AML for the use of the brand? As Executive Chairman of AML, Stroll’s first responsibility is to act in the best interest of the AML shareholders. Stroll has also recently hired Martin Whitmarsh as the Group Chief Executive Officer of the newly created Aston Martin Performance Technologies (AMPT) under which Aston Martin Racing is being folded. Bizarrely, Stroll has just created an almost identical structure to the one McLaren has just dissolved. If I was an AML shareholder, I would watch this situation very closely and be highly suspicious of any large development contract given by AML to AMPT. In terms of humility, modesty, and conflicts of interest, Stroll can give a certain ex-US President and his family a run for their money.
Moers and his leadership team are still a long way from being out of the woods. The light in the tunnel is more likely to be a train heading towards them than not at this point. So far Aston Martin has found a way to survive but it’s not sustainable over the longer term. Aston is still burning through too much cash too quickly. On a straight line basis, they are not on track to deliver against the guidance issued back in the 1st half. While the DBX is helping keep Aston afloat right now, it’s a far cry for being a runaway success and the launch of the Ferrari SUV next year will impact sales going forward. The Sport/GT business has collapsed and it’s not coming back anytime soon. In other areas, the Valkyrie would make for a great Harvard Business School case study on how not to develop a car, and even though deliveries are starting shortly, there still is no evidence the car actually works properly. The fiasco with the Valkyrie at Goodwood now even looks even more inept given the brilliantly executed debut of the Gordon Murray T.50 at the recently completed Goodwood Member’s Meeting. At this point, Stroll’s dream of creating the “British Ferrari” feels closer Lotus than it does Ferrari.
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