Aston Martin, Ferrari, & McLaren Update Q 2 2020

Aston Martin, Ferrari, & McLaren Business Update Q 2 2020

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:

 

Manufacturer

(US $)

Market Cap (as of May 29, 2020)

2019 Group Sales

D% vs. 2018

2019 Cars Sold

2019 EBITDA

D% vs. 2018

Aston Martin

$838 mil.

$1,241 mil.

-10%

5,862

$167 mil.

-46%

Ferrari

$42 bil.

$4,118 mil.

+10%

10,131

$1,002 mil.

+11%

McLaren ‘

$2.5 bil.*

$1,960 mil.

+18%

4,662

$230 mil.

+30%

*Based on last round of investment in 2018. 

 

And this is Q 1 2020:

 

Manufacturer

(US $)

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

Aston Martin

$838 mil.

$99 mil.

-61%

578

-$58 mil.

-266%

Ferrari

$42 bil.

$1,015 mil.

-0.8%

2,738

$345 mil.

+1.9%

McLaren

$2.5 bil.*

$137 mil.

-62%

307

-$101 mil.

-460%

*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:

 

  • McLaren’s Formula 1 Team needs to again become a net profit contributor to the group.
  • The next generation Sport and Super series McLaren’s need to be launched flawlessly and deliver segment leading performance.
  • 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.

 

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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Maintenance Costs – The Ferraris

Maintenance Costs – The Ferraris

Recently I asked for ideas for future articles, I got a lot of requests about maintenance costs.   I believe at the time I replied that it was a highly dangerous topic given Mrs. SSO does read all the articles I post.  However, I’ve decided to take the risk and will do so in several parts.  First, I’ll cover the Ferraris, then the McLarens and finally all the others.  I have always tried to be quite religious with annual services which I’m sure has helped finance better lives for quite a few very talented mechanics.  In addition, any issues that come to light during these annual pilgrimages to the service center get taken care of right away.  My philosophy has always been that small problems only grow into big problems and it is much less expensive to take care of things immediately than to wait.  As a reference point, when evaluating the annual maintenance costs (I define maintenance as annual servicing cost plus replacement of wear & tear items), I take into account the original list price and not our acquisition cost.  A car that cost $250,000 new is always going to have $250,000 car type service costs regardless of what you might be able to buy it for a lot less 5 or 10 years later.  Unfortunately, unlike a car, service costs don’t depreciate over time, if anything they move in the opposite direction as more of a car’s components wear out and need to be replaced.

In no particular order here is a bit of our maintenance cost history.  For the sake of simplicity, I have kept the costs in the currencies they were incurred in.

Ferrari F50 – We owned the F50 for 7 years and the total maintenance costs were £ 29,750.  In fact, looking over the service invoices, this included £13k for the once every decade fuel cell replacement and £5k for a new clutch shortly after I purchased the car.  The clutch replacement was not due to wear but caused by a seal that had failed due to lack of use as the F50 had sat unused for several years before I purchased it.  While the grand total of the services invoices was just under £30k, when you take out the £13k for the fuel cell and £5k for the clutch, the annual servicing costs averaged a quite reasonable (for a limited-edition Ferrari Supercar) £1.7k. 

 

Ferrari 308 GTB – We owned the 308 GTB for just over two years.  This was the fourth 308 GTB built and as an early fiberglass model I was hoping it would be largely immune to rust.  The first annual service was a very reasonable €460.  Turned out I was wrong on the rust and there was plenty of hidden in the door frames.  The second however was a bit more involved and included an engine rebuild repairing the door frames.  The total was €11,790.  In fact, the maintenance cost on the 308 GTB in the two years I owned it equated to just under 50% of its purchase price.

Ferrari 360 Modena – The 360 Modena had a place in our garage for 2 ½ years.  In that period of time it was serviced 3 times.  The first service was basically just an oil and filter change for £710.  The second service did much more damage to the wallet as the 360 was due for a cambelt change and there were a number of other issues that needed to be attended to including the motor mounts.  The total bill on service #2 was £4,910.  The third and final service which included a respray of the front bumper was a much more palatable £1,225 bringing the total for the 2 ½ years to £6,845.

 

Ferrari F355 GTS – The F355 was our first Ferrari and we had it for 3 ½ years. The F355 taught me a fair amount on what Ferrari ownership really involved in terms of both servicing costs and the complexity of the cars.  During our ownership, the F355 was serviced three times.  The first bill was for €3,300, the second was €3,210, and the third a very reasonable €240.  This adds up to a grand total of €6,750 which was roughly 10% of what I paid for the car.

Ferrari 430 Scuderia – During our relatively short year together, the 430 Scuderia made two trips to the Carrs Ferrari Service center.  The first was for an annual service and four new tires.  The bill for this came to £2,340.  The second trip was for a windscreen repair for £45. 

Ferrari 16M – This was our first US based Ferrari.  We owned it for just under two years.  It made one trip to Boardwalk Ferrari for an annual service.  Total bill was $2,640.  This annual service was basically for liquids and filters.  Labor charges were $1,870 of the $2,640.

Ferrari 599 GTB HGTE – The 599 GTB was another 2-year Ferrari for us.  While it was only serviced once at Boardwalk Ferrari at a cost of $3,060, it also rang up a bill of $5,200 for new wheels after losing a battle with a pothole on the New Jersey turnpike which was followed shortly thereafter by four new tires for an additional $1,590. 

Ferrari F40 – We have owned the F40 for 14 years so it’s no surprise that it has run up the biggest tab.  Total maintenance costs to date are £52,930 for the first 12 years in the UK and $5390 since we brought it over to the US.  The £52,930 includes two new clutches at about £3k each and the once every decade fuel cell replacement for £9,000.  The fuel tank replacement on the F40 is not as labor intensive as the F50 so the cost is slightly more reasonable.  The first new clutch was due to normal wear and the second due to a leaky seal caused by an extended stay in storage.  As part of the normal serving schedule, the cambelts on the F40 require changing every 2 years.  Unlike the 348, F355, Testarossa, and BB’s which the engine to be removed to change the cambelts, on the F40 the cambelts are accessible via a panel behind the seats so it’s a much simpler job.   In addition, reupholstering the seats was £3,700 and we had the suspension system refurbished for £6,500.  Other on-going “rolling restoration” expenses for alternators, AC compressors, new fuel lines, etc. are included in the annual maintenance costs.  The F40 has also been through 3 sets of tires as we change them every 3-4 years regardless of wear.  If you take out the fuel cell, clutches, seats, and suspension, the average service cost per year for the F40 in UK was £2,310.

For the Ferraris that we have owned but are not included in the above list, it’s because we either owned them for too short a time to have any meaningful maintenance history or the records have disappeared in one of our many moves. 

I’m not sure what conclusions to draw from this exercise other than Ferraris are not inexpensive to run.  The annual maintenance costs have little to do with the current value of any model, but the service costs are fairly consistent across the range at about £2k per year.  It’s the “wear & tear” items like clutches and fuel cells that really generate the big bills.  Newer Ferraris in general are less expense to run than older models and service costs in the UK seem slightly more reasonable than the US.  I’m not going to add them all up as that just seems unproductive.  Anyways I am sure Mrs. SSO, who is very quick with numbers, will be in to see me for a discussion shortly with the grand total in hand.

More on our complete Ferrari ownership history is in these two articles:

Our Ferrari History Part 1

Our Ferrari History Part 2

P.S. All of the maintenance work on our Ferraris in the UK was done by Carrs Ferrari in Exeter.  They are outstanding and I would highly recommend them.

 

Next up will be our McLaren Maintenance Costs.

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Man Math & Ferrari V12 GTs

Man Math & Ferrari V12 GTs

Man Math & Ferrari V12 GTs

Recently there have been a number of front engine Ferrari V12 Grand Tourers that have appeared on different online auction sites at very tempting prices.  I have to confess that every time one of these pops up, the man math and garage space games start.  The purpose of this article is actually to remind myself why I should not go there again despite a Ferrari V12 being one of man’s greatest creations.  We have owned four front engine Ferrari V12s and none has lasted more than 2 years in the garage.  When I compare this to the average garage life of the various mid-engine V8s we have owned, it is less than half.  The question therefore is why?

The four front engine Ferrari V12 we have owned are a 365 GTB/4 Daytona, 550 Maranello, 575 Maranello (manual with Fiorano Handling Pack), and a 599 GTB HGTE.  The first and last of these were the 2-year cars whereas the 550 lasted about 8 months in the garage, and the 575 made it just over a year.  In all four cases, the V12s were traded in for a mid-engine car.  The 365 GTB/4 Daytona left when the Jaguar XJR-15 arrived.  The 550 Maranello was traded in against the Ferrari F40 (Collecting the F40) while the 575 left for the Mosler MT900S (Mosler MT900S) and landed next in the hands of the #3 driver on car #188 at Garage 59.  Last but not least, the 599 GTB HGTE was traded in for the McLaren 720S (599 GTB Like but not Love).  With the exception of the McLaren 720S, which does both civilized and tasered cat equally well, the other three are far less civilized hard core carbon clad supercars.    There might just be a trend here…….

One of our house rules is that cars that don’t get used need to depart to new homes.  Three of the four V12s fell afoul of this rule and it led directly to their departures.  The outlier, the Ferrari 575, actually was exactly the opposite.  It was my daily driver for a year and that’s what led to its departure.  As a Grand Tourer on road trips, the 575 was wonderful.  The 575 had huge amounts of power, was comfortable, had lots of luggage space, and with the gated 6 speed gearbox was engaging and a joy to drive.  We still have fond memories of driving the 575 across Wales and down to Reims.  As a daily driver however, it didn’t like crawling in traffic on the M25 and the Fiorano Handling Pack made it teeth rattling stiff on Surrey’s pockmarked roads.  As it was acquired for daily duty and didn’t thrive in the role, the 575 was moved on.

Of the other three Ferrari V12s, almost all their use was on road trips.  The 550 Maranello did two epic trips in the short time it lived under our garage roof.  The first was a wonderful summer jaunt from Brussels to Lisbon and the second took us from Madrid to Kassel.  Had the opportunity to acquire the F40 not come along, the 550 likely would have kept its garage spot a bit longer.  The 365 GTB/4 Daytona saw quite a bit of Great Britain during our time together and the 599 GTB HGTE got called to duty for multiple road trips across New York and the New England states.  The catch in all these cases though was when they weren’t being used on road trips, they got very little use.  For a weekend drive, each lost out to a mid-engine V8 that just happened to be a bit more engaging to drive.  Hence this lack of regular use led to their departures.  In the case of the Daytona, the fact that it was a good, but not great one also didn’t help, especially given one of my close friends has one of the best Daytona around.  Yes, I suffered from Daytona envy.  When I bought the Daytona, it was in pretty rough condition.  A year later we had moved it from rough to pretty good and quite presentable.  It was never going to be great though without an additional major investment of both time and money.  Lesson learned, always buy someone else’s restoration project.

Looking back, the fact than none of the front engine Ferrari V12s were long termers was much more to do with my tastes than any shortcomings on their behalf.  All four V12s were brilliant at what they were designed to do, crossing continents at high speed and in comfort.  All had magnificent engines and sounded superb.  The crux however is the demand for these attributes only happened a few times a year.  In the case of the last our V12s, given the choice of a 430 Scuderia or a 599 GTB HGTE for a weekend drive, I would be grabbing the keys to the former 9 out of 10 times.  Add in the fact that today we have what I consider to be the best road trip car we have ever owned, the McLaren 675 LT Spider, and the man math games on the next 550 or 575 Maranello to pop up on Bring a Trailer or Collecting Cars needs to stop.  As much as I like the concept, I do know that if I bought another it would be consigned to the same fate of limited usage followed by garage expulsion 12-24 months later.

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Aston Martin, Ferrari, & McLaren Business Review

Aston Martin, Ferrari, & McLaren’s Challenges

Aston Martin, Ferrari, & McLaren’s Challenges

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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March 2020

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