Aston Martin: The Stroll Era – How Does it End?

This past week Aston Martin Lagonda’s stock price dropped to a new all-time low of 466p.  This is down 78% from its latest 52 week high, making AML stock only a slightly better investment than Dogecoin (-81%) over the past year.  While its stock price isn’t sinking quite as fast as the Titanic did, I’m not sure AML will have any more survivors than the ill-fated ocean liner once things are all said and done.  The answers to why Aston Martin’s stock price is dropping faster than Biden’s approval rating are mostly covered in AML’s Q1 2022 Results and AML’s 2021 Results but the question I have been asked now by multiple friends is how does this end?  This question to answer has a different answer depending on if you are referring to Aston Martin Lagonda (AML, the car company), Aston Martin F1 (AMF1, the Formula 1 Team,), or Lawrence Stroll (AML’s Executive Chairman, largest shareholder, and also the owner of AMF1). 

Aston Martin Lagonda (AML)

Two quotes I found recently that sum up Aston Martin:

 

“Success is stumbling from failure to failure with no loss of enthusiasm.” – Winston Churchill – which neatly summarizes a company that has survived 7 bankruptcies, and:

 

“Failing organizations are usually over-managed and under-led.” – Stephen Covey – which is a pretty good summary of Aston Martin’s most recent history.

 

While the share price is interesting, it is the cash burn that will most likely decide Aston Martin Lagonda’s fate in the near term.  As of the end of Q1 2022, AML had £404 mil. of cash on hand.  Q1 2022’s Free Cash Flow was -£25 mil., a change of -£49 mil. vs. Q 1 2021.  2022 CAPEX for the Sport/GT 2023 relaunch and Valhalla development is planned to be £300 mil. with roughly £233 mil. left to be spent.  Cash interest to be paid in the year to go is £130 mil. If you just net the cash interest and the CAPEX year to go costs off vs. the current cash on hand of £404 mil., you are left with £41 mil.  Adding a bit more color to the situation, current payables are roughly £750 mil. with receivables in the neighborhood of a much more modest £250 mil.  Net Debt is £957 mil. and AML is holding about £330 mil. in total in customer deposits.  In 2021 AML collected £175 mil. in customer deposits and burned through £172 mil. in cash.  Essentially in 2021, AML’s customers were its bank.  While AML might have enough cash to survive this year, it will not get very far into 2023 before the well runs dry.  To top it all off, if AML loses the Nebula court case, they could be on the hook for an additional £150 mil. settlement.  Net net, in terms of solvency, AML is walking on a tightrope over a shark infested lake in front of a hostile crowd throwing rocks.

 

In terms of raising more cash, it’s likely to be a major challenge.  The core AML business is far from healthly with Sport/GT volumes just over half of what they were back in 2019 and the new DBX SUV struggling to sell 50% of its original projected volumes.  With £1.2 bil. in outstanding bonds and bank loans/overdrafts already on the books, it’s unlikely AML will be able to go back to the debt markets to raise more cash and even if they were able to do so, the interest rate they would likely have to pay would make a loan shark blush.  A rights issue is another option, but getting more money out of its already bruised and beaten shareholders, might be more difficult than free climbing a cliff.  To some extent, AML has been using their suppliers to help fund the business, with payables already at 75% of annual revenue and 3x receivables, it’s unlikely AML will be able to stretch this any further.  The final option, and one that AML has already mined deeply, is its customer base. 

AML pulled the customer deposit cash lever hard in 2021 with the Valkyrie Spider, Valhalla 2.0, and final edition Vantage.  All in this netted AML £175 mil. in new customer deposits.  Pulling this lever again successfully in 2022, might well be a much bigger challenge given what’s happened with the Valkyrie coupes recently.  In the 2021 earning’s call, Stroll, in his usual understated, modest, and self-depreciating manner stated:

 

I think you’re having trouble understanding. This is the most complex vehicle ever made to be driven on the road. Being the owner of a Formula 1 team, I can testify that it’s more complicated than building my Formula 1 car. So, we want to deliver them to perfection. They’re all sold, they all have deposits. We’re taking our time to deliver them perfectly.

 

Given the current Aston Martin Formula 1 car isn’t very competitive and the team is next to last in the standings, this doesn’t bode well on AML/AMF1’s ability to produce a car even more complex, to use Stroll’s words.  Therefore, not surprising, “perfectly”, it turns out, means with lots of issues in many cases and with only one of the three driving modes currently working.  In terms of being all sold, that is except the roughly 10 AMR Pro build slots still available While it may be true that all the Valkyrie coupes and spiders are all sold, there are several build slots available via a number of high-end brokers (example: Valkyrie Spider build slot).  Given the current situation on the Valkyrie it is unlikely that AML would be able to generate much interest (and cash via deposits) on a fourth variant (Valkyrie Speedster?) if they were able to announce one right now.  In another attempt to raise cash, AML has started pushing the Valhalla 2.0 again and I would not be surprised if a Valhalla Spider is announced at some point this year.   I would also expect AML will conjure up a few more mildly creative limited editions off of the existing DBS and DB11 platforms in 2022 which will help pull in a bit of cash.  None of these activities will produce anywhere near 2021’s deposit cash haul and are likely to only help replace the deposits that get pulled by customers nervous about AMLs financial situation.

 

All in, it’s very hard to see a situation where AML doesn’t need another major cash injection within the next year.  It’s also very hard to see where that cash would come from given the state of the business.  At this point, an eighth bankruptcy does seem where AML’s business is headed.

 

Being acquired is the one development that would save AML from bankruptcy.  Right now, there are three potential suitors, Geely, Mercedes, and VW/Audi.  Personally, I don’t see any of these as likely buyers.  Geely already has its hands full with Lotus and the geo-politics of a Chinese manufacturer buying another iconic British luxury brand right now makes this unlikely at best.  Mercedes has already had multiple opportunities to buy AML and passed as it does not add to its portfolio. The final option, Audi, is really only interested in the AMR F1 Team.  In addition, VW/Audi already owns the Bentley brand so has little need to add Aston Martin to its portfolio as they target the same general customer.  The other major impediment to an acquisition is a buyer would have to take on all of AML’s debt.  So even if buying out the share (equity) holders cost next to nothing, absorbing all of AMLs liabilities would make this a very expensive multi billion £ proposition.  It would be far easier and cheaper just to wait for AML to go into administration and then just buy the pieces you wanted.  Of all the parts of the AML business, the only one I can see having real value is the Aston Martin brand name.

Aston Martin Racing, the “Works” Formula 1 Team (AMF1): In mid 2018, Lawrence Stroll purchased the remains of the Force India F1 Team and renamed it Racing Point.  In 2019 Lawrence Stroll installed his son Lance, as one of Racing Point’s 2 drivers.  In 2019 Racing Point finished 7th in the F1 standings.  2020, the car dubbed the “Pink Mercedes” due to its semblance to Mercedes 2019 Championship winning car, finished 4th.  With Lawrence Stroll’s ascendence to Executive Chairman of Aston Martin Lagonda, post his investment fund taking a 16.7% stake in the car company, Racing Point was renamed the Aston Martin Cognizant Formula One Team as of the 2021 season, and with this change AML started paying a £21 million annual sponsorship fee to AMF1.  In 2021, AMF1 finished 7th in the standings and in 2022, they are running next to last in 9th place.

 

While Lawrence Stroll has very high ambitions for the AMF1 Team:

 

Per the New York Times, “As with every other business I own, my goal is to win. In this case, winning in Formula 1 means world championships, and ultimately that’s what we are striving for, what I’m striving for.”

 

It is doubtful AMF1 will ever get near an F1 Championship as long as he continues to put his son Lance into one of AMF1’s two seat.  In his five years in Formula 1, Lance has never cracked the top 10 in the F1 Driver’s Championship. In fact, Lance has finished behind his team mate every year he has been part of the Racing Point/AMF1 Team and in the years that the team finished in the top half of the standings, Lance did not.  On a more positive note, I would give Lance the Golden Maple Leaf award as the highest point scoring Canadian Billionaire’s son currently in F1.  Nepotism (see Ivanka, Jared, Hunter, Prince Andrew) rarely works out for the better.

 

Going back to Stroll Sr’s ambitions for AMF1:

“I’ve not made a significant investment in this company not to be fighting for world championships, so we’re going to do whatever it takes, in the rules obviously,” added Stroll.

 

Stroll has made significant investments in staff and infrastructure in the past year.  However, with the team going backwards in the standings, AMF1’s share of the Formula 1 prize money pot has been shrinking year on year.  In other interviews Stroll’s has explicitly stated 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.  It’s impossible to verify how much sponsorship AMF1 has been able to bring in during the last 2 years, but the rumors in the paddock are that the team is under considerable financial pressure.  AMF1’s other sources of cash come from the work AML has given it on building and fixing the Valkyries plus possibly a few other projects.

 

Like AML, which Stroll declared he would recreate as the world’s most desirable, ultra-luxury British performance brand, AMF1 is no closer to achieving any of the lofty ambitions set out for it by its owner.  The AMF1 team is now far from competitive and that while Lance Stroll maybe a talented race car driver, his track record to date gives no indication that he can carry a team to a F1 championship as there are multiple more talent drivers on the grid of a similar age. 

 

Given the situation its highly possible Lawrence Stroll decides to protect what remains of his fortune and the AMF1 Team is put up for sale.  With Audi very publicly on the hunt for a team, they are the likely acquirer.

Lawrence Stroll (AML’s Executive Chairman, largest shareholder, and also the owner of AMF1)

With AML burning through cash and AMF1 going backwards in the Formula 1 standings, you would assume that Lawrence Stroll is about to take a major financial bath.  I doubt he will though if he gets out now.  The £500 mil. investment in AML was done via Stroll’s Yew Tree Investment Fund which includes other multiple very high net worth investors, so Stroll’s personal exposure is likely no more than just over half of the total £500 mil. investment.  The AMF1 acquisition was done via Racing Point, another consortium led by Stroll, and they paid £90 million for the assets while assuming £15 million in debt.  Using the same shareholding logic, Stroll likely owns just over half of the stake.  While his/Yew Tree’s stake in AML is now worth a fraction of what was invested, the value of Formula 1 Teams has soared since his other consortium acquired what is now AMF1.  Based on the estimates I heard in regard to Audi buying an F1 Team, AMF1 is worth 6x what Stroll’s Group paid for it in 2018. 

 

If Stroll is able to sell the F1 team to Audi now for £600 million, his £250 mil. gain on the sale will offset his £250 mil. loss (assuming an 8th bankruptcy) on AML.  Given it would be fairly easy to argue that both AML and AMF1 are in worse shape today than when Stroll took control, it is certainly an interesting world where he is most likely to come out financially whole.

 

Summary

Without a white knight showing up on the doorstep in Gaydon carrying big bags of fresh cash, AMLs outlook looks bleak.  Maybe sales of the DBX suddenly take off this year.  If so that might buy AML just enough breathing room to get to the Sport/GT relaunch next year.  If the Sport/GT relaunch turns out to be a huge unprecedented success, and Aston Martin starts clawing back GT sales from Ferrari, then they might just make it.  I wouldn’t bet on it though.  The AMF1 Team is going in reverse, and after 5 years, it should be pretty clear to even his father, that Lance Stroll isn’t front of the grid material.  Continuing to burn through millions to keep his son on the F1 grid with the rest of his automotive empire in critical condition, has to be getting less and less appealing.  Given Stroll Sr. may now have an out that keeps him financially whole with Audi wanting to get into F1, its likely he will take it and the Aston Martin name will disappear again from Formula 1. 

 

How did Aston Martin get here? It goes back to Andy Palmer and greed.  Palmer used the Valkyrie deposits to fund the DBX development and prop up AMLs balance sheet ahead of the IPO back in Oct 2018.  Highly unusually, none of the money raised in the IPO was invested back into AML and Palmer walked away with a $80 mil. payday.  To further support the IPO, Palmer loaded the AML dealer network with an extra 2,000 cars in 2018.  Simplistically this loading led to a collapse of sales and a financial crisis by late 2019.  In early 2020, Lawrence Stroll was then brought in to bail the business out.  Once ordained as the new Executive Chairman at AML, Stroll announced his grandiose vision to “recreate Aston Martin as the world’s most desirable, ultra-luxury British performance brand”.  A key part of that vision was painting his Formula 1 Team’s cars green and slapping a bunch of Aston Martin stickers all over them (and basically paying himself £21 mil. to do so).  Stroll’s second foray into the ultra-luxury British brands doesn’t seem to be on track to be any more successful than his first. Back in 2000 Stroll and a number of other investors acquired the Royal jeweler, Asprey & Garrard.  The investment group ended up losing $500 mil. back in the early 2006 when Asprey & Garrard became insolvent, was broken up, and the parts sold off to new investors.  Interestingly, back in 2005, Stroll gave an interview to Vogue UK:

 

Stroll is unshaken by speculation that the Asprey empire is faltering. “This is an endurance race, not a sprint,” “Will we win the endurance race? I don’t know. But we certainly haven’t entered the sprint race.” Stroll, whose partners include Silas Chou, Edgar Bronfman Jr, Morgan Stanley Capital and the TAG Group, insists that both he and they are “absolutely committed” to the A&G business.

 

Less than a year later he was out.

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June 2022

 

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12 Thoughts on Aston Martin: The Stroll Era – How Does it End?
    Juan Jaramillo
    19 Jun 2022
     4:09pm

    Now that the Valkyrie rolled out and deliveries happened, I think AML has a chance for giving the world such an aura car.
    The car is just striking beautiful regardless if it can make the super-car numbers… now all the attention and bad publicity goes to the AMG-One

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    Florian
    24 Jun 2022
     6:32am

    A bit unrelated, but do you know if they ever built and delivered all Vantage V12 Zagato Heritage Twins? I wonder if this project was affected by the clash with Nebula Project AG.

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    Stuart
    19 Jun 2022
     4:57pm

    I thought Prince Jefri of Brunei bought Asprey? Or was he just one of the investors alongside Strolp?

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    Aston Martin: The Stroll Era - How Does it End?...
    20 Jun 2022
     11:38am

    […] An analysis on how the Stroll era at Aston Martin Lagonda & Aston Martin Formula 1 is likely to end given the collapse in the stock price and huge debt load.  […]

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    Derrick Underwood
    21 Jun 2022
     10:25am

    Absolutely perfectly sums up of the state of Aston Martin . The company is riddled with arrogance, ego’s , narcissism, corruption ,nepotism , cronyism, naval gazing and short sightedness . The quote about “over managed and under led” is spot on . Andy Palmer should be hiding out from the authorities with his friend Carlos Ghosn avoiding a stretch in prison.
    Stroll has put his hopes on a spent Design director and former Palmer Crony Marek Reichman who has little interest in saving the brand just eeking his last few millions before the ship sinks and he sails off on his sunseeker lifeboat. Sadly the “beautiful brand” has attracted the ugliest in the industry.

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    John
    21 Jun 2022
     10:47am

    I’d defend Lance Stroll as having done not too badly in F1, but at the same time, he’s nowhere near title winning calibre. He’s just ok.

    Stroll SNR, however, is learning that you can’t just keep shouting “brand” and expecting results. He seemed to have done this with Michael Kors, taking the brand and applying it to Chinese goods manufactured by one of his consortium friends from what I’ve read. That worked for him, and good on him. But in the automotive world a bit more substance is required as well as good design. And in F1 results are what counts.

    One of the funniest parts about his takeover of Force India and renaming it Aston Martin was how Marek Reichman spent a whole year picking the right colour of green for the racing cars. Think about it – a whole year to pick the right colour. Just to give an indication on the competence of Reichman, it was quickly discovered that colour of green was too dull and dark that you can’t distinguish it on TV so had to change it! Reichman was boasting about his process in deciding that colour, and when it came to application it failed badly.

    Going back to where it failed, Palmer…

    I’m going to defend him slightly here, although I so this in a carefully measured way. He was right to add an SUV to the Aston line-up. Dr Bez had previously shown a Lagonda prototype with the same idea (which the Bentayga looks to have been styled after). Porsche did one and it was very successful too. It’s not a terrible idea, not originally his idea, but still not terrible.

    Where did it go wrong? It went wrong before the DBX. And I think you have to go back to the One-77. Probably the first whole car that Reichman did for Aston Martin as the successful DBS before then was really mostly done by Callum and Fisker (DB9 based). That was the first indication of how schizophrenic Reichman’s designs are. Then his Vanquish is even more of a mess, and whilst not entirely poor in sales, it just didn’t seem to get any excitement in the press or otherwise around it. It’s a hidden car.

    Then his DB11, probably his high watermark. The inside is a mess, and outside just looks dull. And most of the colours on offer from Aston makes it even duller looking. There’s one which parks near my office and next to it is a black F-Type Jaguar. The Jaguar is far better looking, and it’s what catches my eye.

    Reichman’s Vantage… I don’t know where to begin, other than to say the engineering has never been better. Shame they let Reichman near the design! Inside looks that it had a dozen different designers and they never met once, not even on Zoom. Exterior, the original grill looked like cheap chicken wire from Home Depot / B&Q. Headlights were an afterthought. Bonnet that has no features, sides that have a terrible air scoop instead of the normal Aston one. Sideways it looks that it’s been in a front a rear shunt! And at the rear that someone gave it a double wedgie. Right away it needed a bumper to bumper redesign by a competent designer. All they did was redesign the nose, which is an improvement but not revolutionary. But at least they admitted it wasn’t good design.

    We have a history of poor designs from their head of design Marek Reichman. And then they bet the farm on his design for the DBX.

    At this point the company fails and new owners come in. They have every opportunity to correct the trajectory of Aston with Reichman’s designs, but do they? No, they continue to rely upon his designs that have already failed.

    DBX comes out and it’s not the worst that Reichman has done, but does it sell enough? No. It could be a massive success, but it just doesn’t sell in the numbers needed.

    CEO gets the boot and a new CEO, Felias, comes in. Does he give Reichman the boot too? No.

    2023 is when a new batch of Reichman designs are coming out. Refreshes of the current lines. To imagine that Reichman can produce any success from his designs seems like insanity. Insanity to continue to allow the same person to design failure after failure and expecting a different result. It could happen, but is highly unlikely.

    The failing of Palmer was not to sack Reichman.

    The failing of Moers was not to sack Reichman.

    The failing of Felisa is not to sack Reichman.

    The failing of Aston Martin is Reichman’s design.

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