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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What to Watch, Who to Listen Too

What to Watch, Who to Listen Too

So, as a car enthusiast in lock down, how do you spend your time?  It’s a question a few of my friends have been asking each other over the past couple of months.  The hope behind the question is always that someone has discovered some new exciting show, vlog, or podcast to pleasantly soak up time.  As Covid-19 restrictions of some form remain in place in many locations and are likely to continue for some time, I thought it might be worth sharing a few of my favorites and recommendations.

The Big Screen

Two fairly recent must see movies for any pistonhead are Ford vs Ferrari (titled Le Mans ’66 in parts of Europe) and Rush.  Both feature great racing scenes and are built around compelling stories.  Equally as entertaining is the Netflix series Formula 1 – Drive to Survive.  There are now 2 seasons of ten episodes each available.  This series alone is worth the price of a Netflix subscription.  Senna and The Gentleman Driver are two more Netflix shows worth the time to watch. 

The Small Screen

In full transparency, I am generally not a fan of vlogs and don’t spend much time on YouTube.  The beauty of YouTube is it allows anyone with a GoPro and Laptop to share their thoughts, and creativity.  The downside is exactly that, a huge sea of video vacuousness.  Abraham Lincoln summed up the situation: “Better to remain silent and be thought a fool than to speak and to remove all doubt.” There are however a few YouTube Channels that are well worth watching as they are informative, insightful, and well produced:

Top on my list is Harry’s Garage. Harry was the founder of EVO Magazine and is an avid car collector.  Harry’s has owned everything from a Pagani Zonda to a Fiat 500.  His videos are insightful, cover a diverse range of cars, and his views carry a huge amount of credibility personally as a fellow owner of similar machinery. Harry’s vlogs tend to run 20-30 minutes each and normally just cover one car or subject in a good level of depth.

Following Harry, next on my list is Carfection featuring the only automotive journalist I would trust to drive our Ferrari F40 from Switzerland to the UK, Henry Catchpole.  Carfection’s videos are beautifully produced.  They cover a wide range of cars from a Ferraro 250LM to a McLaren Senna and just about everything in-between.  Henry is quite good on camera.  The videos are both entertaining and have a nice depth of insight.  At 5-15 minutes each in general, it’s a good way to soak up a bit of free time.

Last on this list is Throttle Dogs.  Throttle Dogs is C.J. Wilson and Dr. Rich Ha, basically two hard core petrolheads talking cars.  As a professional athlete and car dealership owner, C.J. brings a different focus and intensity to the conversation.  Both C.J. & Rich really know their cars and the banter back and forth between he two is engaging.  Unfortunately, it looks like they used up the entire production budget on the first vlog as those that follow have far more of a “home movie” charm to them with several just being podcasts.  All are still however compelling to listen to.

Headphones

I have never been a big one for podcasts, but DriveNation’s are excellent.  Dan Prosser and Andrew Frankel are two talented automobile journalists with a huge wealth of knowledge and experience between them.  The discussions are well researched, the topics interesting, and the information timely.  They tend to be just under an hour in length with a new podcast posted weekly.

 

Hope you enjoy the above and please share your favorites in the comment section below.

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Collecting McLarens

Collectability of McLarens

Collectability of McLarens

It’s now been 10 years since the McLaren 12C was officially launched at an event at the McLaren Technology Center.  Antony Sheriff kicked off the launch presentation and was then followed by Ron Dennis & Martin Whitmarsh, outlining the strategy for the McLaren Automotive.  The unveiling of the launch car was done by the two McLaren Formula 1 drivers at the time: Lewis Hamilton & Jenson Button.  At the launch, McLaren claimed to have 1,600 likely buyers lined up with deliveries to start in mid 2011.  While 10 years may not seem to be that long ago, a lot certainly has changed at McLaren since then.  

In my mind, ten years is the first major inflection point that a car crosses on the way to either classic status or a permanent state of ever advancing oxidation.  With the earliest McLaren’s (putting the Mclaren F1 aside as it exists in a completely different universe) now approaching their tenth birthday, I thought it would be interesting to take a shot at predicting which of the many models McLaren has produced in the last decade will become collectable classics in due time and which might not.  

Super Series

There have been three main models in what McLaren today refers to as the Super Series.  They are the 12C, 650S, and 720S.  The 650S and the 720S also had an end of run limited production special track focused editions: the 675LT & 765LT.  All were produced as both coupes and spiders.  In addition, there are 25 MSO HS’ which are a 675LT dialed up to “11”.  I have not included the 765LT as customer deliveries have not yet begun.

12C 

It can be hard going first.  The 12C was both loved and heavily criticized when it was launched.  While technically superior and quicker around a track to its main competition, the Ferrari 458, the 12C took a bashing for not having as much character or soul.  Early “swipe door” 12Cs had a reputation for having a number of quality problems which were resolved during the four-year production run.  Out of the 12C range, long term I believe the early “swipe door” 12C Coupes and, the late 12C Spiders (Our McLaren History – 3 12Cs) will be the most collectable as the former is the first of its kind and the latter the best of the bred.  

As a reference point, I believe the 12C will be viewed long term in a similar manner to the Ferrari 360.  It was the first new mid engine V8 Ferrari developed under Luca di Montezemolo (the F355 was a heavily revised 348) and the first all-aluminum space-frame chassis Ferrari.  The 360 broke new ground on many fronts but also had a number of weaknesses that were addressed by the model that replaced it.

650S

To describe the 650S as a facelifted 12C is to do it a great disservice.  McLaren claimed that 25% of the car was new but the 650S is really a combination of hundreds of small improvements that together deliver a superior car.  Compared to the 12C, it has more power, sharper and yet more compliant handling, fast shift times, and ceramic brakes as standard.  I have used ours as my daily driver for close to five years now (650S Daily Driver) and never had a single issue with the 650S Spider.  In terms of long-term collectability though, I would rank it slightly behind an early 12C.  The 650S doesn’t have the uniqueness of being the first McLaren Automotive road car that the 12C will always carry with it and it is eclipsed by the model that replaced it, the 720S.

A point of conceptual comparison for the 650S is the Ferrari 512BB.  The 512BB is a much better sorted car than its predecessor, the Ferrari 365 GT4 BB.  However, the 365 GT4 BB commands a premium among collectors as it is the first mid-engine Ferrari road car. 

675LT

The 675LT may just be the greatest car McLaren has produced in its first decade as a road car manufacturer. So far the 675LT is my favorite McLaren (Favorite McLaren) and I can’t imagine it loosing that title anytime soon.  It’s the 675LT that put to rest the criticism on McLaren’s lacking personality while burying its main competition, the Ferrari 458 Speciale, across the board in terms of performance.  With only 500 coupes and 500 spiders produced, the 675LT is also relatively rare when compared to the 3500+ Ferrari 458 Speciales.  As the best and last of the 1st generation McLaren road cars, long term the 675LT should also be the most collectable.  However not all 675LTs were created equal.  McLaren Special Operations produced a very limited run of 675LTs on steroids which were badged the MSO HS.  These are the ultimate and rarest of the 1stgeneration McLarens.

I can see the 675LT being viewed a decade or so in a similar light to the Porsche 911 (993) Carrera RS.  The 993 RS is the best and last of the aircooled Porsches with similar production numbers to the 675LT.

720S

If the 675LT was built to bury the Ferrari 458 Speciale in terms of performance, as the 1st model in the 2ndgeneration of the McLaren Super Series, the 720S was designed to outperform every possible competitor, and it did.  The 720S was the first supercar to offer hypercar levels of performance while delivering supercar levels of civility.  If the 650S was a significant improvement on the 12C, the 720S represents a major leap forward.  The 720S does both docile and feral with equal levels of confidence and composure which long term should make it a favorite for collectors.  It will also likely be not only the last of the pre hybrid McLarens but also the best. 

The reference point that comes to mind with the 720S is, a bit ironically, the Ferrari 458 Italia.  The 458 was both a significant improvement on the Ferrari F430 and the last in the line of the normally aspirated mid-engine Ferrari V8s dating back to the Ferrari 308.

Ultimate Series

In ten short years, McLaren has launched four Ultimate Series hypercars: the P1, Senna, Speedtail, and Elva.  In the history of hypercars, the number of models in this a short time frame is impressive unprecedented and yet concerning (Too Much of a Good Thing).  For this article, I’m only going to include comments on the P1 and Senna as customer deliveries of the Speedtail have only just started and the Elva is still at least a year out.

P1

Of the 2014 Hypercar Holy Trinity (Porsche 918, Ferrari LaFerrari, McLaren P1), long term I believe the McLaren P1 will be the one to have.  In this league rarity counts and with over 710 LaFerraris (coupe & spider) and 918 Porsche 918s produced, the 375(ish) McLaren P1s make it a significantly rarer car.  If the LaFerrari is polished and the 918 is a complete technology showcase, then the P1 has a raw edge the other’s lack.  The P1 is also the fastest around a track and is held in very high regard among the very fortunate few who own all 3.  If the P1 has an Achilles heel, is too much technology that may not age well.  The other major concern when it comes to long term collectability is the battery pack. The issues with the 1st generation battery packs were a key reason we sold ours (P1 Farewell) and a long term solution will be critical for P1s remaining viable.  

In terms of collectability, the car that most reminds me of the P1 is the Ferrari F50.  While today the F50 is highly regarded and highly sought after, that wasn’t always the case.  It was more respected than loved most of its existence and got quite a bit of mixed press at launch.  Build numbers between the two are similar as is the purity of the driving experience.

Senna

McLaren’s brief for the Senna was to produce the ultimate road legal track car.  What it lacks in polish, it makes up for with brute force.  It’s a binary car, either you love it or hate it.  In terms of performance, nothing else with a license plate is going to come close to it on a track.  The 500 units produced do detract slightly from its long-term collectability.  Raw focused cars like the Senna do tend to both age well and remain high in the public’s imagination.

Since the first time I drove ours, I’ve thought that the Senna was a modern version of the Ferrari F40 (F40 & Senna).  The F40 & Senna demand similar levels of skill and concentration to drive well while being both immensely rewarding and potentially terrifying.  

Sport Series

To date McLaren has only produced one model, the 570S, in its entry level Sport Series.  The replacement to the 570S is expected to be announced shortly.  The 570S had two end of run special track focused editions, the 600LT and the limited production 620R.  I have not included commentary on the 620R as customer deliveries have just begun.

570S

As McLaren’s entry level sports car, the 570S was targeted at doing everything the Porsche 911 could do, but better.  Whereas the Super Series McLaren’s have all been produced in both coupe and spider versions, the Sports Series included a more practical coupe variant badged the GT with extra luggage room and softer suspension settings.  Commercially the 570 has been a major success for McLaren with the Sport Series making up almost 2/3rd of the cars McLaren has sold in the last several years.  Long term the relatively high production numbers will hold values back but as a highly usable and accessible sports car, it should remain popular. 

I believe the Aston Martin Vantage is a good comparison for the 570S.  The Vantage opened up Aston Martin ownership to a whole new group of people.

600LT

Like the 675LT, of the first-generation Sport Series McLarens, long term the 600LT will be the collector’s choice.  The 600LTs already have a very loyal following among track day enthusiasts for both their superior capabilities and drivability.  Comparing the 600LT to the 675LT is unfair (2 days with a 600LT) but it is still best in its class.

If the Aston Martin Vantage is good comparison for the 570S, then the Aston Martin V12 Vantage provides a good reference point for the 600LT.  Cramming a V12 into the nose of the Vantage transforms the car from quite civilized to just a bit feral while remaining decently civilized.

New GT

The McLaren GT sits on its own outside of the 3 main series of cars.  Its McLaren’s second attempt at attracting competitive Grand Touring driver’s after the moderately loved and short lived 570GT.  The new GT, like all McLarens, is mid-engine which puts inherent constraints on luggage space.  In terms of performance and comfort, it sits right between the 570 and 720 series.  GTs tend to be better loved when new than as collectors’ cars and I can’t see the McLaren GT being any different.

The McLaren GT reminds me of the Ferrari 599 GTB, technically excellent and wonderful to cruise in for hours.  However, it is a car you more like than love (Like but Not Love).

In summary, all McLarens will always have a decent degree of collectability and a loyal following.  Of the models produced to date, my guess is 20 years down the road, the 675LT Spider, MSO HS, Senna, and P1 will be the four most highly sought after with the early “swipe door” 12C Coupes having a cult following.  Time will tell.

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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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