Both Aston Martin & Ferrari reported their Q1 2021 results this week. Ferrari had an excellent quarter, even by pre Covid standards, and then was rewarded by a 10% drop in its stock price. Aston Martin also took a 10% hit to its stock price this week after reporting both a top and bottom line that beat analyst expectations. While the stock market can be quite irrational at times, there do seem to be quite sound reasons behind both reactions. I will cover Aston Martin in this article with one on Ferrari to follow shortly.
2020 was a tale of two parts. The 1st half was a fight for survival and the 2nd half was laying the road to recovery. The results Aston presented all use Q1 2020 as the main point of reference and show enormous improvement. While that presents a nice fuzzy feel-good story, beating a massive turd of a quarter when the company was basically in free fall 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 isn’t a comparison to Q1 2020 but rather how are they building on the prior quarter, Q4 2020.
Free Cash Flow
This now is a very interesting picture. Just based on car sales and revenue, its looks like Aston Martin took a huge step backwards in Q1 versus how they finished the final quarter of 2020. However, you need to really unpack the numbers and look at the context behind what happened to really understand the situation and see if they are on track to deliver the 6,000 units called for in the current 2021 guidance. The car sales need to be split into two very different parts, DBX SUV and the Sport/GT cars. Aston has stated that they have completed the dealer destocking and are now only producing cars to meet demand. As Aston is no longer reporting retail car sales, there is no way of verifying this is actually happening. Given Aston is just emerging from channel stuffing “rehab”, a few quarters of “peeing in the cup” and reporting retail sales would provide a lot more confidence that the business is truly recovering.
Starting with the DBX sales, in Q4 2020, Aston Martin had the full benefit of the new model pipeline fill. They wholesaled 1,171 DBXs in Q4 against retail sales of 593. This left 578 DBXs sitting in dealers’ inventory. Aston Martin has 160 dealerships globally so this amounts to 3-4 DBX’s per dealer. In Q1 2021, Aston wholesaled another 746 DBXs (55% of the total number of cars sold). Assuming that Aston is matching supply with demand and hasn’t relapsed into filling dealers back lots again already, this would straight line to annual sales of 2,984 DBXs which is just under the new revised goal of 3,000 DBXs in 2021 (the original Palmer era goal was 5-6,000 DBXs per year). However, if I combined Q4 and Q1 and then project that to get a full year 2021 number, it’s 10% short of the goal. This feels more like a true run rate and might even be a bit optimistic as these two quarters would have also included quite a number of the “must have the new new thing first” crowd. The only comment offered in any of the Q1 commentary on the DBX order book was that it is “in-line with expectations”.
With DBX already accounting for over 55% of the cars sold in Q1 and 64% in Q4, its fast becoming the core of the Aston Martin business. What this is helping to mask, is the collapse of the Sport/GT car sales. In Q1 2021 Aston sold 601 Sport/Gt cars and in Q4 2020 the number was 629 so this seems like what the run rate will be for at least the next several quarters. Comparable numbers from Q1 2018 and Q1 2019 are 915 & 1,025. I believe these are a reasonable point of comparison to use as the massive dealer loading didn’t really ramp up until the back half of 2019. Net net, sales of the Sport/GTs are now running 30-40% lower than they were pre the late 2019 meltdown and this is unlikely to change anytime soon. In his earning call comments, the CEO, Tobias Moer, referred to the Sports Car range as “aged”. If I do the same exercise on averaging the last two quarters to project a full year 2021 number, its 2,460 cars. That’s an 18% gap to goal.
Aston Martin’s current 2021 guidance is:
2021 Run Rate Based on last 2 Quarters
Depreciation & Amortization
Capex & R&D
And the guidance does not include either a revenue target, which will likely be just under £1 billion, or a profit (loss) target which is likely to land in the -£250 mil. range. It’s very hard to make money when EBITDA barely covers your interest expense. In fact, the road to profitability is questionable even if Aston delivers against the 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. This is a tall ask as Aston Martin is sitting with £1.3 billion in intangible assets on the balance sheet which will need to be amortized over the coming years.
The earnings call provided a few additional insights but wasn’t quite as rich as it has been in the past. It was just the CEO, Tobias Moers & the new CFO Kenneth Gregor on the earning’s call. The Executive Chairman, Lawrence Stroll, and his bombastic claims of grandeur were nowhere to be found. It was interesting listening to Moers on the call, this time he seemed tired and far less interested in sparing with the financial analysts. Looking at a few other areas of interest in a bit more detail:
Regarding the current Sport & GT range, Moer in responding to an analyst question referred to it as “aged”. It doesn’t appear that a major facelift or relaunch will happen before 2023 when Mercedes supplied technology will be available for both the powertrains and infotainment systems. Moer also indicated that all new cars from 2023 onwards will be either hybrid or electric.
Moers and his new leadership team are still a long way from being out of the woods. If 2020 was all about surviving to fight another day, 2021 needs to be the first step towards a solid recovery. Right now, Aston Martin is teetering between just trying to survive and moving forward towards a brighter future. One thing that is clear, without the DBX, Aston would be all but dead right now. While the Mercedes Benz technical partnership gives Aston Martin access to the technology it needs to be able to relaunch the current lineup of Sports & GT cars, that’s unlikely to happen before 2023. Keeping this “aged” line up alive for two more years will be a major challenge. Stroll has a grand vision of turning Aston Martin into the “British Ferrari”. Given the current situation this seems more like intellectual flatulence than a realistic goal. At this point, just getting back to profitability would be a major accomplishment. Right now even becoming a “British Lamborghini” with sales 8,500 cars of which 2/3rd are SUVs would be a major step forward.
Analysis of Ferrari’s Q1 2021 coming shortly…….
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