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The Saga of the Aston Martin Valkyrie

The Saga of the Aston Martin Valkyrie

Aston Martin will be releasing their 2021 Earning’s Report this coming Wednesday, February 23rd.  As customer deliveries of the Valkyrie hypercar will play a large part in this report, I thought it might be worth taking a look back on its history and see how a project that started off with such excitement and promise, has turned into a Greek tragedy that even Sophocles would be impressed by.  In researching its history, as per just about everything related to the Valkyrie, trying to decern facts from fiction is no easy task.

 

The former CEO of Aston Martin and great slayer of shareholder value, Andy Palmer, recently posted a video on Twitter (Palmer – Valkyrie Video) on how the Valkyrie came to be.  It’s a cute story and of course makes Andy look great.  The video makes Andy look like an inspirational visionary who’s creativity initiated the chain of events that would lead to the groundbreaking Valkyrie’s development.  This story has just enough truth in it that it is quite believable on the surface.  However, like most things that include both Aston Martin & Andy Palmer in the same sentence, you need to dig below the surface a bit to find the whole truth.  It turns out that the original idea for what became the Valkyrie was germinated not in a pub in Woburn over sausage & mash, but in the scenic valley just east of Zurich in Switzerland. 

 

The first germination of the idea for what was to become the Valkyrie happened in St Gallen, Switzerland in 2013.  At the time, St. Gallen was the home of one of Aston Martin’s largest and most profitable dealerships which also happened to be the main outlet for the sale of Aston Martin’s highly profitable special models.  Back in 2013 there was a lot of hype and excitement on the upcoming “holy trinity” of hypercars about to be launched by Ferrari, McLaren, & Porsche.  The owners of the St Gallen dealership (aka the Swiss) saw the opportunity for Aston Martin to get on this highly profitable gravy train.  The Swiss approached Ulrich Bez, the CEO of Aston Martin at that time, and pitched the idea for a mid engine Aston Martin hypercar.  Bez, who was on his way out the door, had little interest so the idea was shelved.  Roll forward to 2014, Bez is gone, and the father of the Nissan Leaf, Andy Palmer was now ensconced in the corner office in Gaydon.  The Swiss decided to give it one more shot and repitched the mid engine idea, this time to Andy Palmer.  Palmer embraced the concept and agreed to take it to the Aston Martin Board of Directors for approval.  The Aston Martin Board signed on, but under the stipulation that the Swiss would underwrite the project. 

With the basis for a deal in hand, the Swiss set up a new company, Nebula Project AG, in 2015 as the co-initiator and underwriter for the Aston Martin mid engine projects.  In return for underwriting the projects, Aston Martin agreed to pay Nebula Project AG an undisclosed royalty on what was to become the Valkyrie and all other Aston Martin mid engine cars for a period of 10 years.  A steering committee for the mid engine projects was set up with both Nebula and Aston Martin holding an equal number of seats.

With the basic structure and financing in place, all that was needed now was an actual car to sell and customers to buy it.  Where the idea to approach Red Bull F1 Racing Team about the project came from I have not been able to identify.  However, once that decision had been made, it is where Andy Palmer did play a critical role as he was well connected to the Red Bull F1 Racing Team going back to his days at Nissan.  Over sausages and mash at a pub in Woburn, Palmer pitched the Swiss’s mid engine hypercar idea to Red Bull’s Christian Horner (Team Principal), and Adrian Newey (Chief Technical Officer).  For Horner, this had to seem like a gift from the heavens.  Newey had recently received a large financial offer from Luca Montezemolo, CEO of Ferrari, to take over development of both Ferrari’s road and race cars.  A key part of the attractiveness of the Ferrari offer was it would have allowed Newey to achieve one of his goals, to design a ground breaking road car.  As just a race team, this wasn’t something Red Bull could match on their own.  However, by joining forces with Aston Martin, Horner could give Newey his road car project and keep him from jumping ship to Ferrari.  While it would take over a year for the final deal to be put in place, the framework for it was done and it looked like a win-win all around.  The Swiss would get a ground breaking hypercar that their well heeled clients would fight each other over to get the right to buy, Aston Martin would get an image enhancing project that would enhance their profile ahead of the future planned IPO, Newey would get his road car, and Horner would retain the greatest current designer in Formula 1 for Red Bull.

Roll forward to mid 2016 and development of what was now called the AM-RB 001 had reached a point where it could now be shared with the public.  The basic design work had been completed but the final details were still under development.  Despite the £2.4 /$3.2 million plus price tag, a long list of potential clients has already been lined up for all 150 road car build slots.  At this point it was also announced that a smaller production run of more extreme track only versions would follow the road cars.  First deliveries were targeted for the end of 2018. 

In March 2017 at the Geneva Motor Show, Aston Martin announced that the AM-RB 001 had been officially named the AM-RB Valkyrie and further details on its performance and specification were released.  List price was set at £2.4/$3.2 million.  All 150 road versions of the Valkyrie now had customer deposits against them.  The specs shared at this point in time indicated that the Valkyrie would be powered by a Cosworth supplied 6.5-liter V12 hybrid producing over 1,000 horsepower coupled to a bespoke seven-speed paddle-shift transmission.  The power-to-weight ratio goal was set at a highly ambitious 1:1 (one horsepower for every kilogram of kerb weight).   Bosch would be developing bespoke Engine Control Unit (ECU), Transmission Control Unit (TCU) and Electronic Stability Program (ESP) systems for the Valkyrie and Alcon/Surface Transforms, would supply the bespoke braking system.  First deliveries where now planned for 2019.  Looking back today, this was probably the high point of the Valkyrie’s development.

 

In addition to giving Aston Martin the halo car it needed and a road into the mid engine segment of the supercar market, the Valkyrie also delivered something that Aston Martin deeply desired, a huge influx of cash.  Buried deep in Aston Martin’s 2018 IPO Prospectus is the following statement:

 

During 2016, Aston Martin Lagonda generated £164.6 million from operating activities and £74.3 million from improved working capital, in particular due to deposits received for future sales, in particular for the Aston Martin Valkyrie. Over the same period, Aston Martin Lagonda used £190.2 million in investing activities as it continued its investment in new products. 

 

The £74.3 million referenced equates very closely to what would have been the initial £500k customer deposits on each of the 150 Valkyries with  £750k more to come by the end of 2018. Without the deposit money, Aston Martin would have been in a cash negative position.  Hence 2016 marks the beginning of Aston Martin’s addiction to customer deposit funding and it’s been “chasing the dragon” ever since.  More customer deposit funds would flow into Aston Martins coffers in 2017 and 2018.  By May 2018 all 25 of the Aston Martin Valkyrie AMR Pro track only cars had been spoken for with hefty deposits paid.  List price on the Valkyrie AMR Pros is around £4 million.

 

The 2018 IPO Prospectus lists Aston Martin’s cash as of June 30, 2018 at £71.5 million.  This is only about 1/3rd of what would have been collected in terms of deposits by that period of time.  Question is where did the money go?  While some of the funding was definitely used to develop the Valkyrie, it’s also highly likely that a not insignificant amount helped pay for the DBX SUV program.  It’s also quite clear that without the funding that came along with the Valkyrie, Aston Martin’s cash position would likely have been quite negative, making the IPO even more difficult to execute (I will come back to Aston Martin’s October 2018 IPO in a later article.  A quick sniff test on it led to burnt nostrils).

With cash in short supply resources being diverted to the DBX’s development, by 2019 it had become quite apparent that the Valkyrie program was well behind schedule and the cracks in Aston Martin’s overall business were beginning to show.  Initial Valkyrie deliveries had been pushed to 2020.  To divert attention, Aston Martin announced the 2nd and 3rd cars in the mid engine program and presented both at the Geneva Motor Show that March.  The 2nd car in the series, originally designated the AM-RB 003, was later renamed the Valhalla.  The Valhalla was sold as a more civilized version of the Valkyrie with a limited run of 500 units.  List price was estimated at around $1.2 million, and Aston Martin has happy to collect a $300k deposit to secure a build slot.  Aston Martin’s business continued to deteriorate through 2019 and within a year of the IPO, Aston Martin’s shares had lost 75% of their value. While the Valhalla helped Aston Martin’s cash position early in 2019 as deposits funds flowed in, by the end of 2019 it was a drain as many of the early depositors requested refunds.  The Valkyrie did make its public debut in 2019 where it managed to complete one lap of the Silverstone circuit ahead of the British Grand Prix however, going into 2020 deliveries had officially been pushed back to start in the 2nd half of 2020. 

 

In early 2020, Aston Martin was in a precarious financial position, and it looked like a record 8th bankruptcy might be in the cards.   At this point, Aston Martin had to bring in a major outside investor, Lawrence Stroll, to provide badly needed liquidity to avoid going under.  Once Stroll had ensconced himself as the new Executive Chairman, Palmer was unceremoniously jettisoned, Tobias Moers from Mercedes-AMG was hired as his replacement, and the Valkyrie steering committee was disbanded.  Shortly afterwards Stroll pushed first deliveries on the Valkyrie to 2021 while embarking on a cost cutting program that would significantly increase the car’s weight.  At this point there was also a major loss of talent on the Valkyrie development team, and Adrian Newey had little further involvement in the car’s development.  The relationship with Red Bull continued to worsen throughout 2020.  By the end of the year, Red Bull had officially exited the Valkyrie development program and “RB” was removed from the car’s name.

 

Up until now, most of the issues with the Valkyrie’s development had been kept out of the public eye.  That all changed in mid 2021.  First in June, Aston Martin under Stroll & Moers leadership lodged a request in Switzerland for a criminal prosecution, plus a parallel civil action, against the Board Members of Nebula Project AG.  The Aston Martin release on the proceedings reads:

 

Aston Martin Lagonda Global Holdings plc (“Aston Martin” or “the Company”) announces that it is filing for civil legal proceedings against Nebula Project AG and, with the support of a group of its customers, criminal proceedings against its board members in order for the prosecutor to investigate any potential criminal behaviour following the failure to pay some customer deposits for Aston Martin Valkyrie programme orders received by Nebula Project AG to the Company. The Company has also terminated the underlying commercial agreement with Nebula Project AG.

 

Both Aston Martin and its customers have been impacted by Nebula Project AG’s and its board members’ behaviour. Aston Martin is fully committed to supporting and working with those customers affected to ensure that they will still receive delivery of their Valkyrie programme vehicles as scheduled, prioritising customer relationships, despite the Company not having received all the deposited funds. There are no other agreements like this in place and going forward the Company will ensure that all deposits for special vehicles are received directly by Aston Martin, not through a third party.

 

In 2016, the prior management team of Aston Martin entered into an arrangement with Nebula Project AG to underpin the development of the Aston Martin Valkyrie and certain other mid-engine programmes. Under the terms of this agreement Nebula Project AG was to receive royalty payments, which could have been significant over time, linked to production volumes of these programmes and Nebula Project AG meeting its funding commitments. As a result of the termination of this commercial agreement with Nebula Project AG, Aston Martin is no longer liable for any of these potential royalty payments.

 

The Company is today also terminating the dealership arrangements it had with AF Cars AG, a company operating Aston Martin St.Gallen in Switzerland and managed by the same board members as Nebula Project AG, after learning that vehicles have been sold in breach of terms of the dealership agreement. The Company is focused on maintaining service for customers as a priority with the four other dealers it has in Switzerland operating as usual.

 

The net financial impact to Aston Martin of this extraordinary event is expected to be positive over time, as the financial impact of not having received all the deposited funds, is expected to be outweighed by the benefit from the termination of the Nebula agreement and associated potential royalty payments. However, for the year ending 31 December 2021 it is expected to reduce both cashflow and EBITDA by up to £15 million, including a provision of up to £5m of trade debtors. The Company expects to book the provision in the second quarter and for the remaining impact on cash flow and EBITDA to arise primarily in the fourth quarter. The Company is confident that the net negative impact for 2022 can be managed within current expectations.

 

This is the statement issued by Nebula Project AG in response to the notice of proceedings from Aston Martin:

 

Having reviewed the Regulatory News Service (RNS) distributed by Aston Martin Lagonda Global Holdings plc today we are surprised and disappointed about the aggressive tone of the RNS. We have had a strong working relationship with Aston Martin during the past 11 years and have been a loyal partner contributing significantly to Aston Martin’s sales and profit especially through the successful distribution of limited-edition special vehicles.

 

Nebula Project AG entered in good faith into the agreement with Aston Martin regarding the Valkyrie and other mid-engine programs and has always fulfilled its obligations as co-initiator of said project in accordance with the existing arrangements with Aston Martin. We are convinced that Aston Martin’s allegations towards us in connection with the Aston Martin mid-engine programs are entirely unfounded. On the contrary, we and our customers have been significantly impacted by Aston Martin’s behaviour as partner of the project, resulting among others in a delay of Valkyrie customer deliveries by more than two years due the late start of its production.

 

We consider Aston Martin’s alleged unilateral termination of the contractual relationship with Nebula Project AG as illegitimate and unjustified and are prepared to pursue the necessary steps to preserve our rights. Contracts have to be honoured despite any shareholders and management changes.

 

We are convinced that the value of the royalty payments which Nebula Project AG is to receive from Aston Martin is significantly higher than insinuated by Aston Martin. Finally, we want to make it clear that we keep our commitments if Aston Martin keeps their obligations.

 

At first glance, this seems like a financially challenged Aston Martin looking for an excuse to get out of having to make the royalty payments to Nebula on the mid-engine cars.  Building the case around the non-passing on of customer deposit money by Nebula to Aston Martin feels very thin at best.  These deposits would have been originally collected back in 2016/2017.  Aston Martin has been cash strapped for years.  Suddenly, 4-5 years and numerous audits later, the Aston Martin accountants suddenly discover they are missing £15 million?  In addition, if Nebula was holding funds that should have been passed along to Aston Martin, wouldn’t it make more sense to simply request the money instead of blowing up a long-standing relationship with a group that has been incredibly patient through all of Aston Martin’s drama over the last decade?  My guess is Stroll simply saw Nebula as a cost he could either get rid of or at least delay by tying the things up in litigation which would take years to work its way through the various court systems.  I would not be surprised if Stroll is betting that by the time all the lawsuits are resolved, he will have passed Aston Martin on to new owners, and it will be their problem to deal with.  The other driving factor is quite possibly that the Valkyrie has become a very “bad math” car for Aston Martin.  When they set the list price at £2.4 million back in 2017, they had a fairly limited idea on how much it was going to cost to develop and build.  The Valkyrie is intended to be as close as possible to a Formula 1 car while being street legal.  Just the basic carbon fiber tubs on a F1 car runs $600-$700k.  The bespoke Cosworth V12 engines likely cost around $250-300k each so pretty quickly it becomes quite difficult to turn a profit on building the Valkyries, hence Stroll’s push to cut cost wherever possible.  I would also not be surprised if the Valkyrie is a “cash negative” production issue for Aston Martin now with the build costs of each unit now being higher than what is left for Aston Martin to collect from a customer when it finally delivers the car.  The pressure on costs also helps explains the sudden announcement in 2021 that Aston Martin would build an additional 85 Valkyrie Spiders (and collect a total of £1.5 million in customer deposits on each one) as this would allow them to spread the development costs over significantly more units while shoring up their cash position.

With the Nebula relationship now publicly splattered and Red Bull having washed its hands of the Valkyrie, Aston Martin was now in sole control of the program.  The Valkyrie’s major global “coming out” party was planned for the Goodwood Festival of Speed.  Per Aston Martin’s original press release, the plan was:

The highly anticipated Aston Martin Valkyrie is due to make its Goodwood Festival of Speed debut at the show. The crowd will be delighted to see – and hear – Valkyrie take on the famous Hillclimb past Goodwood House in the ‘Supercar’ batch.  Accelerating from 0-60mph in under 2.5 seconds and powered by an almighty, naturally aspirated 6.5-litre V12 engine producing 1160bhp, Valkyrie – which will be driven by Aston Martin Cognizant Formula One Team driver Lance Stroll on Saturday – is surely set to be the star of the show.

This isn’t exactly what happened.  Originally Aston had planned for the Valkyrie to complete 11 runs over the 4 days.  The final count was less than half that number.  On Thursday, the Valkyrie did complete a run on the Hillclimb but a close look at the video seemed to indicate that the active aero had been turned off, the car was quite skittish, and not particularly quick (there is no official time for any of the Valkyrie’s runs but per the video it looks to be around 1 minute 15 seconds, as a reference the McLaren 720S GT3X did it in 45 seconds).  Inboard video footage that Aston posted indicated that the check engine light was on, the active aero was off and so were all the ECS systems.  This is very much in line with information I have gathered that Aston Martin was having major difficulties getting the Valkyrie to run properly.  If the situation was bad on Thursday, it got worse on Friday when the Valkyrie broke down on the hill (apparently with the influencer Shmee as a passenger in the car) resulting in a red flagging of the session and Lawrence Stoll (Aston Martin CEO) cancelling his appearance at the last minute.  This was actually the second time the Valkyrie had broken down at Goodwood. 

Post the Valkyrie’s Friday fiasco, Lance Stroll’s Saturday appearance was quietly cancelled, and Tobias Moers suddenly showed up likely with a Lawrence Stroll size shoe print on his posterior.  While Moers did successful get the Valkyrie up the hill fairly slowly on Saturday, it broke down again on its way back to the paddock.   Adrian Newey also drove the Valkyrie at Goodwood and afterwards described it as having a way to go until it is fully ready for customers with development still to be done. He also stated the car at Goodwood didn’t have active suspension and there’s a lot of mapping work still to be done. 

In many ways, Goodwood was the high point for the Valkyrie in 2021.  Post the Goodwood fiasco, which Aston Martin’s PR team did do a great job of trying to bury, and despite Newey’s comments that further development was needed, Tobias Moers reiterated a commitment that the first delivery would happen before the end of the year.  At the time according to a few ex Aston Martin employees, Stroll & Moers were apparently putting immense pressure on Multimatic to produce the car as cheaply as possible.  These sources also indicated that given the massive problems Multimatic has had trying to get the electronics to work in the road cars, the Valkyrie Pro AMR track cars are also being prioritized as they do not include the sophisticated electronics & hybrid system. 

In November, Moers very excitedly announced that Aston Martin has completed its first customer Valkyrie.  Aston Martin’s plan was to deliver a “double digit” number of Valkyrie coupe road cars this year alongside a “single digit” number of the track only AMRs before the end of 2021.  What actually happened was Aston Martin shipped 10 Valkyrie and Valkyrie AMR Pro vehicles in December. “Shipped” it turns out just meant that the Valkyries left the Gaydon manufacturing facility and were deposited in a warehouse in Southern England. The first Valkyrie wasn’t actually delivered to a customer until mid January in Munich.

Where does this leave us?  At a recent event Stroll made a few comments about the Valkyrie.  He blamed delays that have dogged the company’s £2.4m Valkyrie supercar on the complexity of the project.  He claimed the deliveries have been held back to maintain quality, so the rollout will take longer than initially hoped. Stroll also stated that all orders have substantial deposits and no customers have wavered.  On the later statement, Stroll does have a relationship with the truth that most politicians would appreciate (Stroll also claimed that the Valkyrie’s issues at Goodwood were just due to a £5 part).   He also stated that Aston Martin has a complexity issue on the Valkyrie and that they overestimated the number of cars they could build (the carbon fiber tubs take eight weeks to make) until they started building them.  Given the Valkyrie has been touted from day one as a highly complex groundbreaking project, that last statement by Stroll is shocking.

With production now started, Moers has claimed that he expects to build 3 Valkyries a week in 2022.  However, given how long it takes to build the carbon fiber tubs, it looks more likely that Aston Martin might be able to deliver 40 Valkyries this year.  This is also the number I have heard the current production capacity and tooling will support .  The number also ties nicely with the number 30-40 Cosworth V12s that Aston has purchased to date for the Valkyrie. To hit Moers’ number, he would need to both find another Multimatic type supplier and a specialist carbon fiber manufacturer both willing and capable of building the highly complex tubs for Aston Martin at the low cost point he and Stroll have demanded.  Even if Aston Martin could find suppliers capable of doing it, it’s unlikely Aston has the cash needed to be able to do this as its very likely the suppliers’ terms would be payment on delivery given Astons long tawdry payment history.  Then Aston needs to have enough carbon fiber on order, which is highly unlikely.  In total Aston Martin has committed to producing 260 Valkyries across the three variants (Coupe – 150, AMR Pro – 25, Spider – 85).   At a rate of 40 Valkyries per year, it is going to take them 6 ½ years to build all the cars.  Even if Aston Martin can double the production rate to 80 a year, some owners will not be getting their cars until Q4 2024.

In summary, it looks like best case, it will be a decade from sausages and mash at a pub in Woburn to when the last Valkyrie leaves the production line.  What started off as a dream by a small group of businessmen in Switzerland has tuned into a very expensive nightmare for them.  They not only have been forced out of a project they initiated and underwrote, but also lost their Aston Martin dealership in the process.  In fact, all the key players originally behind the Valkyrie project are long gone now. Andy Palmer who did play a key role bringing all the key parties together was sacked by Stroll in early 2020 and Red Bull exited shortly thereafter.  So, who actually are the winners in this whole saga?  Its Investindustrial V L.P and Adeem Investment and Wealth Management Company. They were the two big private investment funds that cashed out of Aston Martin in the 2018 IPO.  Without the customer deposits the Valkyrie brought in, that IPO may not have happened.

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February 2022

 

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Analysis & Insights on Ferrari’s 2021 Results

Analysis & Insights on Ferrari’s 2021 Results

Ferrari had an outstanding year in 2021.  Every single key financial indicator is now headed in the right direction.  They beat their guidance on every single metric and with a broad and fresh product portfolio, they are poised to deliver outstanding growth in the years to come.  Ferrari enjoys an overflowing order book and seems to be navigating the move to hybrids seamlessly.  Ferrari’s 2021 results are a case study in what a highly competent management team, executing a clear strategy, that’s supported by wise forward thinking ownership looks like.  Despite the stock price being down recently, and well of off its 52 week high, Ferrari is still carrying a market cap over $40 billion.  The recent share price drop is more a reflection of overall turmoil in the stock markets these days directly than a condemnation of Ferrari’s performance.  The CEO transition to Benedetto Vigna has been flawless and Ferrari has done a superior job navigating through the pandemic vs. all of its major competitors.  I believe this is reflected in the transparency that Ferrari demonstrates when it presents the results.  As it has throughout 2021, not only did Ferrari provide the usual year ago comparisons (which due to COVID are irrelevant) but they also provided the comparisons to the same period in 2019.   

Ferrari’s superior job of navigating through the pandemic has given it a highly advantaged competitive position moving forward.  In the two main “volume” segments of Ferrari’s business, the Sports Range and Gran Turismo Range, two of its main competitors, McLaren & Aston Martin, have fallen back considerably.  In the Sports Range, McLaren has reduced production significantly and while its current range is still highly competitive, McLaren is struggling with the transition to next generation hybrids.  On the Granturismo side of the business, Aston Martin has effectively ceded the field to Ferrari.  Aston Martin’s current GT range is, in the words of Aston Martin’s CEO, “overage” and with updates to Aston Martin’s models not coming until late 2023, Ferrari should have achieved complete dominance in the GT segment by then.

The Ferrari earnings call was a bit less insightful than usual which I believe will be the norm going forward as it is a reflection of the new CEO, Benedetto Vigna’s style.  The CFO, Antonio Picca Piccon was also on the call and did his usual nice job of handling the various questions tossed his way.  Vigna comes across as a modest man who holds his card closer to his chest than his predecessors.  I do miss having John Elkann, Executive Chairman and former acting CEO, on the call as Elkann was always willing to provide a bit more color and insights into Ferrari’s longer-term strategy than the more reserved Vigna.  The areas that I found interesting follow (note: in terms of the financial results, I am using 2019 as the reference quarter as it gives a more balanced picture on the strength/weakness of the numbers):

  • 2021 Key Results: The key numbers for Ferrari in 2021 were 11,155 cars sold, (up 10.1% vs 2019), Net Revenues of €4,271 million (+13.4%), and EBITDA of €1,531 million (+20.6%). Free Cash Flow reversed 2020 negative trend and came in at a positive of €642 million which is +370% vs. 2020 and just -4.9% v. the record set in 2019.  The huge turnaround in FCF in 2021 really highlights the strength of the business. In 2021, Ferrari returned €393 million to its shareholders via both dividends and the share repurchase program.  Piccon stated that the order bank for all models stretches well into 2023 despite the order book being closed now on certain models that are being phased out.

Over the last several years, Europe received 46-48% of Ferrari’s production.  This jumped up to 55% in 2020 and dropped back a bit to 49% in 2021 as more cars were sent to China and North America. North American deliveries accounted for 26% in 2021, down from a high of 32% in 2018 but still up 21.8% in terms of actual units. Ferrari seems to quite deliberately adjust supply to take advantage of currency movements.  As the US dollar strengthened in 2021, the US received a higher allocation of new cars. Supply in the US, even with a 21% increase in units, is still short of demand.  As a result, residuals on recent model are at an all-time high and in several cases 1-2 year old used cars are selling for over the original MSRP.
  • Product Mix & Profitability: Ferrari’s 2021 profits were €833 million up 37% vs. 2019. Portfolio mix was a positive €130 million driven by the Icona range Monza SP1 & SP2, 812 GTS and the SF90 Stradale.  Historically it’s been the big V12 GTs that have driven Ferrari’s profitability.  This has now all changed with the introduction of the Icona range and hybrids. The SF90 range is highly profitable, and I expect the 296 GTB to fall into the same category. One area where Ferrari did get a bit of push back on was the guidance on profitability mix for 2022.  Delays in the timing of a few of the new models is the one impact the pandemic has had on Ferrari.  It now looks like Purosangue SUV & the next generation Icona SP3 Daytona deliveries will not be starting until 2023, while production on the Monza SP1 & SP2 is basically complete and the limited edition 812 Competizione & Competizione A deliveries are only starting in Q4 2022.  Net net, basically 2022 will be year without an Icona or another Hypercar in production which pulls down the profitability of the product mix a bit.  It’s a short term timing issue, not a long term problem and without the impact of Covid-19, I doubt it would have happened.

 

  • Cash Flow, CAPEX, & Debt: 2021 Industrial Free Cash Flow came in at €642 million. This is a €470 million improvement on 2020 number and just slightly down vs. a record €675 million in 2019.  The recovery in the FCF number to near the 2019 record high is massively impressive.  Ferrari has very ambitious plans and is generating the cash needed to bring them to life as demonstrated by the €737 million in 2021 CAPEX spending.  As per auto industry norms, Ferrari only capitalizes 50% of its CAPEX spending, with the balancing hitting the P&L in the current year (unlike certain other Supercar manufacturers which capitalizes a much higher percentage which helps inflate EBITDA).  I don’t see any concerns with Ferrari’s current debt load.  Total debt is down by €95 million vs. 2020 to €2.6 billion, cash and equivalents are flat at €1.3 billion with total liquidity of €2 billion.  Ferrari does not have any major debt coming due until 2023 and has enough cash on hand today to retire all of the debt that is maturing up through 2024.  In July 2021, Ferrari successfully placed €150 million in bonds due in 2032 with US institutional investors. 

 

  • Portfolio: Ferrari’s current portfolio is by far the most complex in its history with still more to come this year. The strategy that’s delivered the current portfolio was first articulated back in Q3 2018.  It was then that Ferrari changed the way it segmented it’s portfolio from V8s & V12s to Sport Range, Gran Turismo Range, Special Series, Icona, and Hypercar.  This change in thinking gave Ferrari the license to build out its portfolio in a way it never had been able to in the past.  Redefining the old V8 segment to Sports Range has allowed Ferrari to counter the threat from McLaren’s emergence in the past decade while redefining the old V12 GT segment to Gran Turismo has really put a fork in Aston Martin’s core front engine Sport & GT car business.  Ferrari has promised two new road car models in 2022, one is the worst kept secret in Supercar history, the Purosangue SUV and the other is most likely a Spider version of the 296 GTB. A replacement for the recently discontinued 812 Superfast is not likely to emerge until 2023.
  • Hybrid & Electric Cars: Back in Q3 2021 analysts call, Ferrari indicated that they will be launching the first fully electric Ferrari in 2025. The Executive Chairman, John Elkann is clearly driving the strategy and Vigna now needs to deliver it.  What was interesting in this analysts call was very little was said about the move towards EV, and Vigna indicated that Ferrari would continue to produce internal combustions engines for as long as there was customer demand for them.

 

  • Racing & Stores: The Formula 1 team has been a major drag on Ferrari’s finances over the last couple of years. While finishing 6th in 2020 was a drag on 2021, given the timing of the payouts from Formula 1, the Ferrari F1 Teams 3rd place finish in 2021 does point to a more financially rewarding 2022.  The F12 Teams driver line up is now settled for the next several years, and the major rule changes coming into effect in 2022 provide an excellent opportunity to get back to the very front of the grid.  With Covid store closures ending in 2021, total “brand”, which includes both racing, licensing and stores, was up by €6.5 million in 2021.

2022 Targets

Other than Net Revenue, the 2022 targets do not look overly ambitious, even taking into account the headwinds on product mix due to the phasing on the Icona model transitions.  My guess is Ferrari is under promising and will then over deliver, helping to build credibility for the new CEO with investors.  The next Capital Market day will be on June 16th in Maranello where Ferrari will unveil its next major multiyear business plan.  Vigna will want to have plenty of tailwind at his back going into that event.  The other call out is 2022 is Ferrari’s 75th anniversary.  In honor of this I would not be surprised if Ferrari announces a new very limited highly margin enhancing model that will have been presold to a handful of its best clients.

 

Summary

The Ferrari machine keeps going from strength to strength.  It’s executed a major CEO transition flawlessly and Ferrari’s hefty $40 billion market cap reflects this.  It will now be Vigna’s job to lead Ferrari seamlessly through the transition to hybrids and EVs, launch the Purosangue SUV, and park the F1 Team on the pointy end of the grid.  In 2021, Ferrari beat their guidance on every single financial metric, now they just need to repeat this in 2022, which given the current model portfolio, bruised competition, and overflowing order book, they should be able to do.

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Will Audi Buy McLaren? & a Brief Update on the Aston Martin Saga

Will Audi Buy McLaren? & a Brief Update on the Aston Martin Saga

Since last November, there have been multiple rumors that Audi (technically it would be the Volkswagen Group which owns Audi, Bentley, Lamborghini, Porsche, and a number of other brands) is about to buy McLaren. McLaren, via Zak Brown CEO of McLaren Racing, has publicly admitted talks have taken place but no agreement has been reached.  The reality is these sort of talks between companies do take place on a fairly regular basis and almost all come to nothing.  Even when they do get well advanced, it’s no guarantee a deal actually happens.  BMW made an offer for McLaren a number of years ago that was turned down.  So, the question is, how likely is an Audi takeover of McLaren?  To be able to answer the question, the first thing you need to do is understand McLaren’s Corporate Structure followed by its ownership.

The New Corporate Structure

In 2021 McLaren took several aggressive steps to get its financial house in order that resulted in major changes to its Corporate Structure.  These changes would make any takeover of the business significantly more complicated.  Going into this decade, the McLaren Group was a combination of 3 operating companies: Automotive, Racing, and Applied Technologies that all rolled up into a common ownership structure.  As of mid 2021, the McLaren Group now looks very different.  The Racing and the Automotive businesses have been decoupled and the McLaren Group is now essentially an automotive manufacturer with a large (85% currently, dropping to 67% in 2023) equity stake in an F1 Team (McLaren Racing).  In addition, the Applied Technologies division was sold off in August 2021. 

 

Ownership

As a private company, it’s difficult to decern for certain what the current shareholdings are but as of 2021 the owners of the McLaren Group were:

 

  • Mumtalakat Holding Company (Bahrain Sovereign Wealth Fund) 56.4%
  • TAG Group Limited (Mansour Ojjeh) 14.32%
  • Nidala (BVI) Limited (Michael Latifi) 9.84%
  • Favorita Limited 5.78%
  • Perlman Investments Limited 5.77%
  • McKal Holdings Ltd 5.24%
  • Acanitt Limited 2.65%

 

In addition, Ares Management Corp & Saudi Arabia’s Public Investment Fund (“PIF”) hold £400 million in Preference Shares and Equity Warrants.  There may be other holders of Equity Warrants and Preference Shares not publicly disclosed.

 

And for McLaren Racing:

 

  • McLaren Group 85% currently, dropping to a minimum of 67% in 2023
  • MSP Sports Capital 15% currently, rising to a maximum of 33% in 2023

 

This new Ownership Structure makes gaining majority control of both the McLaren Group and McLaren Racing fairly straight forward (you would only need to acquire Mumtalakat Holding Company’s (Bahrain Sovereign Wealth Fund) 56.4% shareholding) but a full (100%) buyout extremely complicated given the number of different shareholders who have come in at different times and likely have different expectations on what they are looking for as a return on their investment. 

Audi

The rumors of Audi buying McLaren appear to be based on the thesis that the Volkswagen Group wants to get into F1 under the Audi brand and that acquiring McLaren Racing would be the most efficient and effective way to do so.  While that may be true, getting the McLaren Group to agree to a buyout of just McLaren Racing would be difficult to say the least.  Right now, the McLaren Group’s 85% holding in McLaren Racing might just be their most valuable asset.  Racing is also at the core of the McLaren equity so relinquishing control over the racing side of the business would be highly unpalatable. In addition, a situation where you have two distinctly different companies (McLaren Group for Automotive and Audi for McLaren Racing) owning and managing the same brand name is a recipe for disaster.  For Audi, buying McLaren Racing and then dropping the McLaren name also makes little sense as much of what they would be paying for is the McLaren brand and its F1 heritage.  Buying all of McLaren also makes little sense for the Volkswagen Group as they already have several brands (Bentley, Lamborghini, & Porsche) in similar spaces on the automotive side.  In fact, its more likely that the Volkswagen Group is looking to divest several of these brands (Bugatti has already been sold off), not add to its collection.  Where I can see the potential for a deal is on the Racing side.  Audi could come in as a minority partner, title sponsor, and engine supplier.  The F1 Team would then operate as Audi McLaren. While that situation would not give Audi complete control of the F1 Team, it would get them a seat at the table, their name on a car, and open the door to future cooperation.  Overall, it would be a situation familiar to McLaren.  From 1995 to 2009 Daimler-Benz (Mercedes) was a 40% shareholder in the team.

BMW

There has also been a bit of buzz that McLaren recently has had a couple of conversations with BMW again.  I have no idea if this is true but it would almost be an inverse situation vs. Audi.  The McLaren Automotive business would fit in well with BMW’s other brands but the Racing side would be of no interest.  BMWs last foray into F1 didn’t end well and I can’t see them being interested in diving back in.  Not being in F1 since 2009 certainly hasn’t hurt BMWs car business.

Summary

The only thing clear at this point is the Volkswagen Group under the Audi brand is looking to get into F1 in the near future.  The easiest path is via acquiring an existing F1 Team and McLaren would certainly rank at the top of the list for potential targets.  For McLaren having a deep pocketed corporate overlord would certainly be of interest.  Getting the alignment of all of McLaren’s shareholders for any transaction would certainly be a herculean undertaking.  Whether the VW Group would be willing to take on McLaren Automotive in order to seal the deal for McLaren Racing is very much to be determined.

And a brief update on the Saga of Aston Martin

 

When we last left the Valkyrie (Aston Martin Annouces Earnings Miss), Aston Martin had claimed on Jan 7, 2022:

 

10 Aston Martin Valkyrie and Valkyrie AMR Pro vehicles were shipped in Q4

 

“Shipped” it turns out just meant that the Valkyries left the Gaydon manufacturing facility and were deposited in a warehouse in Southern England.  The first Valkyrie wasn’t actually delivered to a customer until mid January in Munich.  Since then, two more “customer” Valkyrie coupes have appeared at Aston Martin dealerships and one Valkyrie AMR Pro has shown up in Switzerland. Only the Munich Valkyrie has been seen on the road, but that was only for the filming of a short “spotted on the road” driving video that Aston Martin arranged and posted on its social media accounts.  To date there have been no independent sightings of a Valkyrie being driven which does serve to reinforce the belief that it still doesn’t work properly.  In the “Trading Update” that Aston Martin released on January 7th, one of the “positives” they called out was a Year-end cash balance of c.£420m.  A bit of quick math indicates that this is roughly equivalent to the value of the deposits Aston Martin has collected across the Valkyrie range.  However, Aston Martin has also collected significant amounts in deposits for the Valhalla, V12 Speedster, and V12 Vantage Final Edition. 

Regarding the rumors of Tobias Moers future at Aston Martin being in doubt, there have been several reports in the press on Stroll approaching outside executives about the position.  From what I’ve heard, Stroll’s challenge is no one wants the job.  These types of positions can be very difficult to fill, for example no one wanted the job of CEO at Lehman Brothers in August 2008.

 

And finally, on the DBX SUV, Aston Martin just announced a new more powerful version, the DBX707.  The imagery the name evokes is an interesting one as my memories of the Boeing 707 are of a loud, dated, & quite uncomfortable airplane.   Aston Martin stated they expect to sell 4,000 DBX707s per year with it making up 60% of total annual DBX sales (which would be 6,600).  Considering Aston Martin struggled to “ship” 3,001 DBX SUV in 2021, this seems like quite the stretch.  I can only imagine that these projections were done at a coffee shop in Amsterdam.

 

Aston Martin reports its 2021 earnings on February 24th.

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Are there any Supercar Bargains left?

Are there any Supercar Bargains left?

I’ve refrained from doing a market update for the past several months as a lot of what is happening in the car market overall still doesn’t make a lot of sense.  Porsche Carrera GTs suddenly jumping up $1 mil. in value and 1-2 year old V12 Ferraris, which normally have the financial buoyancy of the Hindenburg next to a lite match, selling for over the sticker price is not a sign that normalcy has broken out again.  When dealerships are demanding $50k “market adjustment” fees on new trucks (See: Greed is Good Award) , and getting it, the inmates have truly taken over the asylum.  With chip shortages continuing to constrain production across almost all manufacturers well into 2022, it’s doubtful things will be changing anytime soon.  The question is, in all the madness, are there any supercar bargains left?  The following are a few that I have found that I believe are still good buys after scouring numerous classified and auction sites for Aston Martins, Lamborghinis, Ferraris, & McLarens.  To qualify, for the list, a model had to be highly regarded at launch and currently valued at less than ½ its initial list price. 

Aston Martin Vanquish & Vanquish S

The 2001-2007 Vanquish & Vanquish S were the last of the handmade Aston Martin’s to come out of the Newport Pagnell manufacturing site.  Personally, I think it’s the most elegant car Aston Martin has produced.  During its production, the Vanquish was Aston Martin’s flagship V12 GT.  The chassis is bonded aluminium composite with a carbon fibre backbone.  The V12 delivers 460 hp at 6,500 rpm, throttle is drive-by-wire and the gearbox is a 6-speed automated (F1 type) manual transmission.

Today you can pick up an early Vanquish for $60-80k depending on spec and mileage.  There is no other 21stcentury bespoke V12 close to this in price.  Looking at cars on the market, I wouldn’t pay a huge premium for a low mileage example.  Better to put the savings into a few sessions with a therapist so you can work through the trauma of how bad that first generation automated manual transmission is. Aston Martin will do a full manual conversion on a Vanquish but that will set you back over $30k.  Its tough to make that math work on a car that’s now worth $60-80k.

Aston Martin DB9

Aston Martin produced over 16,000 DB9’s during its 2004-2016 production run so there is no shortage of cars on the market.  The DB9 was the first Aston Martin built off of the aluminum VH platform which served as the base for all Aston Martins for over a decade.  The VH platformed doubled the rigidity and cut weight by 25% vs. the prior model.  The V12 in the front nose was lifted out of the Vanquish and produced 450 bhp when the car was launched. 

An elegant V12 GT for the same price as the $50k “market price adjustment” fee on a Ram Truck has to be one of the better values in today’s market.  The last dozen DB9s to sell on Bring A Trailer have all been in the same $40-60k range as a Lotus Elise.  Most DB9s were fitted with a 6 speed Touchtronic automatic gearbox but a 6-speed manual was also an option and does command a 15-20% premium today.  If you can find a manual, I do believe the premium is worth it.  Early DB9s are famous for having electrical issues but most should have been sorted long ago. 

Ferrari 360 Modena

In many ways the Ferrari 360 was the 1st of a line of mid engine V8 Ferraris that ran for over 20 years through the F8.  Back in 1999 it was the first Ferrari to use an all-aluminum space-frame chassis and was powered by a new 3.6 liter flat-plane crankshaft V8 engine producing 395 bhp.  The design marked a move away from angler wedge shapes to more rounded aerodynamics.  Build quality was dramatically improved and cambelt changes were no longer a costly engine out exercise.

 

Today you can get an early 360 Modena for $80k with manuals commanding an additional 15-20% premium.  Unlike its predecessor, the Ferrari F355, values on 360s basically haven’t moved in the last couple of years which makes them the bargain of the Ferrari world right now.  Ferrari produced around 18,000 360s so there are always plenty on the market.  The high production numbers have also served to hold down values.

 

Ferrari 599 GTB

If the 360 Modena was the first of a new generation of V8s, the 599 GTB played the same role on the V12 GT side of the Ferrari business.  Back in 2006, the 599 GTB was the first Ferrari GT to be built on an aluminum chassis and was powered by a 6.0 liter V12 engine producing 612 bhp which is very closely related to the engine last found in the back of the Ferrari Enzo.

 

In today’s market $150k will land you a nice 599 GTB.  The original list price on a 599 GTB was just north of $310k, before any of the multiple option boxes were ticked. Most 599s are highly spec’ed cars so you can add at least another $30-40k on top of the base price.  Despite being a Grand Tourer and designed to eat up huge number of miles effortlessly, most 599’s have seen fairly moderate amounts of use and there are plenty around with under 25k miles on the odometer. 

McLaren 12C

The McLaren 12C was McLaren Automotive’s first production car when it was launched in 2011.  The 12C was built on a carbon fiber tub and is powered by a 3.8 L twin-turbo 616 bph V8 engine.  Performance at launch was best in class.  The 12C can do 0-60 mph in 2.8 seconds and top speed is well over 200 mph. 

Around $110k should be all it takes to land a good spec well maintained McLaren 12C in today’s market.  For the money, you will be getting a car that not only outperformed everything in its class when launched, but could still keep pace with a Ferrari F8 up to 60 mph.  Spiders command a slight premium over the coupes but lose next to nothing in terms of performance due to the carbon fiber tub.

 

Two more that I ran across that fall into the Sports Car category are the:

Porsche 911 (996 & 997)

The base versions of first two water-cooled 911’s are still relative bargains these days.  While the lines on the 996 are a bit polarizing, they are the current bargain of the Porsche world.  The newer 997 still commands a premium over the 996 but early versions now fall under the 50% of original list bar.  Personally, I prefer the 997 and believe they are a model that will age well.  $20k will get you into a base 996 Carrera but it will cost you $35k for a similar condition 997.

 

Maserati Granturismo

Early Maserati Granturismos have to be one of the best bargains in the current market.  For $30k you get a Ferrari powered great sounding proper GT.  Granturismo production ran from 2007-2019, and with over 40,000 produced is likely the best selling Maserati of all time. 

Summary

While this is a relatively short list, it’s not through lack of trying.  I looked at a wide range of different models but in the madness that’s today’s Supercar market, finding a bargain is harder than getting a getting a Ferrari 296 GTB build slot.  All the cars on the list are between 10-20 years old which is just over the point where normal depreciation curves flatten out.  They all fall into the group of yesterday’s models but not old enough to be classic yet.  With interest rates starting to rise again, and new car production likely to return to normal by the back half of 2022, it will be interesting to see if a lot of the recent jumps in values hold, or if there will be a lot more bargains come 2023.

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