Last week I posted an update on the outlook for the Supercar Market which briefly touched on the health of a few of the manufacturers. Writing that article prompted me to go look a bit more deeply into the health of several of the larger supercar manufacturers to try and understand their current situations as we are all trying to gauge the impact that the Coronavirus will have on different parts of the economy. Looking at the three major independent supercar manufacturers, Aston Martin, Ferrari, and McLaren (Lamborghini as part of the Volkswagen Auto Group is in a very different situation) the question is what challenges do they face and can they 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:
|Manufacturer(US $)||Market Cap (as of April 9, 2020)||2019 Group Sales||D% vs. 2018||2019 Cars Sold||2019 EBITDA||D% vs. 2018|
|Aston Martin||$825 mil.||$1,241 mil.||-10%||5,862||$167 mil.||-46%|
|Ferrari||$37.9 bil.||$4,118 mil.||+10%||10,131||$1,002 mil.||+11%|
|McLaren ‘||$2.5 bil.*||$1,800 mil. (est)||+19%||4,800 (est)||$211 mil. (est)||+140%|
*Based on last round of investment in 2018.
‘McLaren will release their full year 2019 results on April 23rd
Starting with the strongest of the three, from a financial perspective, Ferrari is clearly performing well and has been for multiple years. The stock market values Ferrari as a luxury good manufacturer with a P/E ratio of 35, much more in line with Hermes or LVHM than FCA or Ford. In fact, Ferrari’s market cap today is more than 2X that of its former owner, FCA. Ferrari sells 0.2% the number of cars FCA currently sells but makes 15% of FCA’s EBITDA. Hence why it is viewed by the financial markets as a luxury goods manufacturer. Ferrari’s $38 billion market cap also gives it a very strong currency for acquisitions, which could prove to be critical as cars move from internal combustion engines to electric.
Ferrari in general is well run and has been consistently executing against Luca di Montezemolo’s business plan which turned Ferrari around in the early 1990s. However, there have been a few deviations from di Montezemolo’s basic strategy, both fairly recent. These can be traced back to when Sergio Marchionne, CEO of Fiat Chrysler, forced di Montezemolo out over disagreements on increasing production to drive the increased profitability that Marchionne badly needed to prop up other parts of the Fiat Empire. Di Montezemolo always advocated that Ferrari should produce at least 1 car less than market demand. This drive for profits over long term brand development has led to the increase in the number of enormously profitable limited edition and hypercars, resulting in market saturation (Too Much of a Good Thing). In addition, Ferrari has ramped up production of its base models for the first time in decades. This has resulted in Ferrari dealers courting buyers today vs. the old approach of letting you know how fortunate you were to be allowed to buy one of their cars (Dealing with Ferrari). Ferrari’s F1 team is a net profit contributor to the company and this should increase even further when the Formula 1 spending cap takes effect in 2021. The biggest risk Ferrari faces right now is to its market cap should it need scale back on production, especially of the highly profitable limited-edition models.
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. 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. Versus 2018, sales dropped 10% and operating profit dropped $147 mil. to a loss of $46 mil. In December 2019 the Group held $98.1mil. of contractually refundable deposits, up from $62.6 mil. in 2018 so they are using customers money to help prop up a very weak balance sheet. If more customers like ourselves, pull their deposits on the Valhalla, this will deteriorate fast. Net leverage soared in 2019 to 7.3x adjusted EBITDA, up from 2.3X in 2018: 2.3x and ROIC was an anemic 0.3%. Net net, it’s a pretty ghastly situation so it’s no surprise that Aston Martin had to bring in a major outside investor, Lawrence Stroll, to provide badly needed liquidity. With Stroll taking over, this represent the 3rd change of control since Ford sold Aston Martin off back in 2007. If stability and continuity are key attributes of a successful business, Aston Martin feels like it was built on the side of an active volcano that sits on top of an earthquake fault line. Given these constant changes in control, it’s not hard to figure out why Aston Martin has always been a “slow follower” in the sportscar industry. Aston’s first mid-engine car is coming 47 years after Ferrari’s and its entry into the SUV segment is “only” 17 years behind Porsche. Aston has bet the house on its SUV, the DBX, and given the current situation, I can’t imagine a worse economic climate for it. Given its dire financial position, Aston lacks the resources to invest in the next generation electric power trains and in fact took a $50 mil. write off in 2019 when it cancelled the Rapide E project. Aston Martin’s multi-million dollar sponsorship of the Red Bull team in recent years is another questionable investment as I believe Aston gets little to no brand credit for Red Bulls performance on track. To the world at large, it’s the Red Bull F1 Team, not Aston Martin Red Bull. Its anemic share price, along with a very significant $1.2 bil. debt pile are barriers to any acquisitions.
So why is a smart successful businessman like Lawrence Stroll investing in Aston Martin? It can’t just be to get his son out of that silly pink Racing Point race suit and into something more masculine. Stroll made his money in fashion and luxury goods. My guess is he is looking at Ferrari’s $37 billion market cap and betting he can transform Aston from being a niche, poorly performing, car manufacturer with a great global brand name into a luxury goods manufacturer along the lines of Ferrari. Even if Stroll just drives Astons share price back to where it was at the IPO 18 months ago, he’s gotten a 5X plus return on his investment. If Stroll can someday match Ferrari’s market cap, he will make billions. How does he get there? My guess is by taking Aston into an 8th bankruptcy and using it to clear the $1.2 bil. of debt off the balance sheet, write off a large part of the massive investment in the DBX program, and re-privatizing the company. Stroll then focuses on building a luxury brand around the F1 Team, a mid engine sports car, front engine GT, and sport luxury SUV.
Which brings us to McLaren. On the surface, McLaren’s financials look quite respectable. It has a growing business, the ten-year-old supercar business makes money, and as a privately held company, has been able to attract outside investment whenever necessary including $250 mil. in 2018. This latest investment largely washes with the $340 mil. McLaren paid to buy out Ron Dennis when he departed in mid 2017. The long-rumored IPO is now likely pushed back to mid this decade given both the current market situation along with blow back from Aston’s disastrous IPO. McLaren has now been in the car business for a decade and its currently annual production of 4,800 cars is not too far off the long-stated goal of 6,000 units by 2025. The company, to a large extent, still represents the vision of former longtime CEO, Ron Dennis. McLaren today is shaped not only by his brilliance but also still suffers from a few of his misfires. On the car side, marketing was not exactly Dennis’ strong point, and his lack of interest in the “driving experience” vs. outright focus on performance metrics negatively impacted the reputation of the early models. McLaren also has a bit of a negative reputation for quality and reliability. Personally, we have never had any issues (McLarens & Reliability) and on these sort of things you tend to only hear when there is a problem. I believe the quality issues that have occurred are both related to the way McLaren builds cars and should be now mostly resolved for the same reason. McLaren builds cars on a fixed assembly line with the same team building the entire car. As production was ramped up in the last several years, many new hires were added to the production teams. In any job there is a learning curb and mistakes are made during that process. With planned production for 2020 reduced well head of any Coronavirus impact, mistakes leading to reliability issues should largely dissipate as all the assembly teams now have a fair amount of experience. McLaren has been the most proactive of the three manufacturers in terms of reducing supply to meet demand, even cutting production on the latest Elva hypercar from 399 units to 249.
However, Ron’s greatest misfires ironically were on the Formula 1 side of the business which he had nurtured and built since 1981. The failure to find a new title sponsor after Vodafone departed in 2013 combined with the disastrous switch to Honda engines in 2015 (as forever enshrined by Fernando Alonso’s “GP2 engine” comment), has left the McLaren F1 team both uncompetitive for most of the last decade and as a financial drain on the overall Group. Unlike Ferrari, where the F1 team is a major contributor to the bottom line, the McLaren F1 team is a drag on McLaren’s bottom line to the tune of around $60-80 mil. a year. In recent years, and for the first time since 1981, McLaren has sold off a number of historic F1 cars to partially offset the cost of the current F1 Team. Improved recent results on the track, along with the Formula 1 spending cap which takes effect in 2021, should significantly help McLaren’s bottom line going forward.
While relatively healthy now, going forward McLaren has a three key challenges it needs to overcome to persevere. A new Group Executive Chairman, Paul Walsh, was recently installed to guide McLaren through these challenges and my guess is then to an IPO several more years down the road (I met Mr. Walsh at a private business dinner where he spoke years ago. He was both very impressive and a commanding presence.) First and foremost, I believe, McLaren’s Formula 1 Team needs to again become a net profit contributor to the group. Second, the next generation Sport and Super series McLaren’s need to be launched flawlessly and deliver segment leading performance. Third they will need to fill the profit gap left by the longer timing now necessary between Ultimate series models given the recent market saturation in this segment.
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. McLaren is a bit more of a mixed bag as half of its business is in relatively good shape and the other half challenged but with a pathway back to health. 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.
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