In early April I posted an article on the challenges Aston Martin, Ferrari, and McLaren were facing in light of the Coronavirus (Aston Ferrari McLaren Challenges). At that time most of the world was just several weeks into a lock down that would ultimately bring large parts of the global economy to a halt. Eight weeks later, those lock downs are starting to lift in many countries and a “new normal” is taking root. This new normal looks nothing like the world circa 2019 and that world is unlikely to return until a vaccine is widely available. With all three manufacturers now having posted their Q1 results, in this rapidly changing environment, I thought it would be worth taking another look at the health of Aston Martin, Ferrari, and McLaren, the challenges they are facing, and what needs to be done to survive.
I am a firm believer that you need to not only understand the situation today but also have a firm grasp on history to be able to even remotely predict the future. A strong, healthy, well-run company isn’t something that happens overnight, it takes years to build. On the other hand, baring a crisis, a poorly run, sick company can crawl along on life support for years. The difference is right now we have a crisis, and the risk to a poorly performing business in this environment is significant.
Below are the financial indicators that I normally start with on any company I am taking a look at. These are the full year 2019:
Market Cap (as of May 29, 2020)
2019 Group Sales
D% vs. 2018
2019 Cars Sold
D% vs. 2018
*Based on last round of investment in 2018.
And this is Q 1 2020:
Market Cap (as of May 29, 2020)
Q1 2020 Group Sales
D% vs. Q 1 2019
Q 1 2020 Cars Sold
Q 1 2020 EBITDA
D% vs. Q 1 2019
*Based on last round of investment in 2018.
Clearly things got very ugly for McLaren fast, Ferrari hit a small speed bump, and Aston Martin continued to unravel. In the two months since the end of Q1 2020, these trajectories, if anything have only accelerated.
Starting with the strongest of the three, from a financial perspective, Ferrari is clearly performing well and is well positioned to both weather the crisis and emerge in a position of increased strength. To give an idea of just how solid Ferrari’s current position is, they have enough cash on hand to just about cover all their debt that matures in the next two years. In the past two months Ferrari’s market cap has actually increased by $4 billion, more than the combined value of Aston and McLaren. In fact today Ferrari, which produces just over 10k cars a year, is worth more than either General Motors (7.5 mil. cars/year) or Ford (6 mil. cars/year). The stock market values Ferrari as a luxury good manufacturer with a P/E ratio of 37, much more in line with Hermes or LVHM than GM or Ford. When announcing the Q 1 2020 results, Ferrari did issue guidance for the balance of 2020. At the high end of the guidance EBITDA is expected to be -5% vs. 2019. In normal times this would be a poor year, in today’s circumstances, if they can deliver it’s a very strong result. Ferrari will also benefit significantly from the Formula 1 spending caps coming into place and has reduced its driver cost by an estimated $40 million in 2021 with the switch from Sebastian Vettel to Carlos Sainz. The biggest risk Ferrari faces right now is to its huge market cap should it miss 2020’s reduced targets.
Financially, Aston Martin’s situation is just plain ugly, again. It’s gone bankrupt 7 times in its history and an 8thdoesn’t seem out of the realm of possibility depending on how the next year plays out. From its IPO in Oct 2018, which valued Aston Martin Lagonda at a little over $5 bil, 18 months later AML’s value sits at 16% of that after the share price recovered a bit in the last week. It’s a spectacular destruction of shareholder value in a relatively short period of time. Q 1 2020 for Aston Martin continued the downward spiral Aston perfected in 2019. All of Aston Martin’s hopes and dreams right now are wrapped around the DBX SUV. Whether the post Covid-19 economy will be a welcoming one for yet another $200k+ SUV is highly debatable. Even if it is a success, it may be too little too late. Lawrence Stroll, brought in to provide badly needed liquidity, is now officially the Executive Chairman and owns Aston’s future. He recently hired Tobias Moers away from Mercedes-AMG to be Aston’s new CEO and to execute the turnaround. What is quite shocking is this is really the only major move, other than a bit of belt tightening, Aston has made in the last couple of months.
In the first article I wrote that “Aston Martin feels like it was built on the side of an active volcano that sits on top of an earthquake fault line” and nothing that has happened recently would change my point of view. Andy Palmer, the former CEO who just recently found out (via a reporter at the Financial Times in a stunning display of poor transition management) that his presence was no longer required looks to be carrying the bag for the current mess. Whether Dr. Palmer is to blame for the current situation is an interesting discussion. He was brought in back in 2014 by the controlling private shareholders to polish Aston Martin up for an IPO. Palmer was brilliant at delivering against that mandate. He doubled Aston Martin’s revenue between 2015 and the IPO in 2018, more than tripled EBIDTA, almost doubled car sales, while holding debt levels steady. For his troubles, Dr. Palmer walked away with roughly $40 mil. when Aston went public. The key words in the last sentence are walked away, because if Andy had taken his cash and ridden off into the sunset, his reputation would certainly be very different than what it is today. If pre-IPO Aston was a discipled financial enterprise under Palmer, post IPO Aston exhibited all of the financial disciple of an alcoholic locked in a brewery. Net leverage soared in 2019 to 7.3x adjusted EBITDA, up from 2.3X in 2018 and as of Q 1 2020 sits at an even more frightening 10.4x. The warning signs that this was going to go off the rails certainly date back to 2018 and the way the IPO was structured. All money raised from the IPO went to the existing shareholders and did not generate any cash for Aston Martin which could be reinvested in the business. It’s a clear message that the group that got Aston to this point had little interest in its future. Throw in a couple of head scratching completely off strategy vanity projects like Project Nepture – the Aston Martin Submarine, and the Aston Martin Apartments in Miami, and its clear management had begun to lose the plot.
So, if Lawrence Stroll and Tobias Moers are going to save the day and turn Aston Martin into the “British Ferrari” with a P/E ratio north of 30x, they first need to stabilize the business and stop the bleeding. It’s surprising that a restructuring program has yet to be announced as reducing costs is a critical step in these sorts of situations. The one line of the P&L that has been increasing well ahead of revenue for a few years is “operating expense”. This points to an organization becoming increasing bloated and less efficient. Ditch the submarine and the Miami apartments, they are nothing more than an unnecessary distraction. Finally get the long-delayed Valkyrie finally out the door and take a hard look at if Aston really has the resources (and the demand) for the Valhalla. Same goes for the V12 Speedster. If not, you still have time to pin it all on the Palmer regime and to walk away. Finally, pray hard that the post Covid-19 world really does have a need for the DBX SUV.
Which finally brings us to McLaren. In the first article I wrote that McLaren needed to do three things to get the business back on track:
Coming out of 2019, McLaren’s financials looked quite respectable. It had a growing business, the ten-year-old supercar business made money, and as a privately held company, has been able to attract outside investment whenever necessary. On the surface, it was the F1 team that presented the biggest financial challenge and the supercar business looked solid. Then Q1 2020 happened and McLaren’s results imploded. The F1 team is certainly no longer McLaren’s biggest issue. McLaren sold fewer cars and lost more money in Q 1 than Aston Martin. Some of this was by design and some of it not. What caused this, well the “hamster” died in late 2019. The “hamster” in this case, which had spun the wheel that powered the McLaren financial model since 2015, was the Ultimate Series and LT series cars. The model simplistically was that the high profitability from the limited-edition cars would help fund incentives when needed to keep the regular production supercars moving out of dealer’s showrooms. What killed the “hamster”, overwork and exhaustion. Instead of keeping the Ultimate Series cars as a once in every 5+ years event, McLaren had started churning them out on an almost annual basis as McLaren had become reliant on the profits. In addition, the last LT car produced, the 600LT was no longer a capped production run and McLaren flooded the market with them. What happened in 2nd half of 2019 broke the model. The last Ultimate Series car launched, the Elva didn’t sell out and McLaren was forced to cut the planned production run from 399 units to 249. The writing was on the wall for the Elva by the way the secondary market was allowed to develop for the Senna. With no restrictions on how long you needed to hold the car for, a significant number of Senna owners flipped the cars shortly after taking delivery. This gut of Sennas on the market depressed values and for the 1st time in memory, a limited edition hypercar was available on the secondary market at or below list. While I do believe the way Ford managed the application process for the GT was atrocious, the one thing they did do right was lock owners into holding their cars for at least two years. At the same time this was happening, in order to move a glut of 600LTs out of showrooms, McLaren was having to provide incentives. So instead of the 600LT being a high profit contributor, it became a drag on the P&L.
The roots of McLaren’s problem date back to 2016 when McLaren launched the Track22 plan which called for 15 new models in 6 years. McLaren then doubled down 2 years later with an updated Track25 plan which called for 18 new models by 2025. The plan laid out was audacious to say the least. McLaren then borrowed heavily to fund the development of all these new models, leading to the significant debt problem they are currently facing. Net leverage is currently at an Aston like 7.8x adjusted EBITDA. In reality it was too many new models, too fast, that the market could not absorb. Eight to ten years between new production models with a revite/update/facelift at the mid-point and a minimum of five years between Ultimate Series cars feels like a much more reasonable plan. In addition, the production ramp up on all these new models did cause a few reliability issues that got very over hyped in a few social media platforms. (Personally, we have never had any issues McLarens & Reliability). The net impact on McLaren’s reputation though has not been positive.
To McLaren’s credit, they did realize they had a major problem well prior to the Coronavirus taking its toll. Planned production for 2020 was already reduced heading into this year and McLaren just announced a major restructuring. In addition, capital spending and marketing costs have been cut substantially. The launch of the new Sport Series models has been pushed back to 2021 and the main focus for 2020 is delivering the “hamsters” dying gifts, the Ultimate Series Speedtail & Elva, along with highly profitable 765LTs.
In summary, all three supercar manufacturers have their challenges. For Ferrari these are not outside what one would expect for a highly successful company in a challenging environment. What happens to Aston Martin is anyone’s guess. It’s in dire straits but like a phoenix, Aston Martin is exceedingly good at rising from the ashes to live yet another day. If the DBX lives up to expectations, Aston might just make it. Or at least for long enough for Stroll & Company to cash out handsomely. McLaren went off the rails quickly, even if the warning signs have been evident for a while. When things are going well, and by most measurements 2019 was a very good year for McLaren, it’s easy to ignore the warning signs. McLaren does seem to understand their issues and is taking action to address them. The good news for McLaren though is their cars are still best in class.
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