Blog: Will Aston Martin’s IPO miss the marque?

By Richard Umpleby, Investment Manager, Brewin Dolphin

According to the James Bond film franchise, you only live twice. Yet, in slightly more than a century 007’s favourite car manufacturer, Aston Martin, has lived almost as many lives as a cat.

The venerable British marque appears to have turned a corner on its seven bankruptcies, following chief executive Andy Palmer’s appointment in 2014. In its 105th year of operation, Aston Martin will list on the London Stock Exchange in one of the most-anticipated initial public offerings (IPOs) of recent times.

On Thursday (September 20 2018), the automaker announced its intention to seek a valuation of up to £5.07 billion, with a price range of £17.50 to £22.50 per share on the 25 per cent stake that will be up for grabs on 8th October. Achieving a price towards the upper end of the range could secure the company a place in the FTSE 100.

Many petrolheads and Bond fanatics will be tempted to buy in. But they would do well to exercise a note of caution – compare the touted valuation of Aston Martin to some of its contemporaries and the business looks a little rich.

Take the example of Ferrari, which is listed on the New York Stock Exchange at around $130 per share. The Italian stallion trades at around 20 times next year’s operating earnings and produces more than 8,000 cars per year with an average selling price of around $300,000. Last year it saw a net profit of around €537 million on revenues of €3.4 billion.

Contrast that with Aston Martin, which at the middle of the price range would trade at only a small valuation discount to Ferrari, while producing around 5,000 units per year at an average selling price of around $200,000. In 2017, the company said production and sales were at a nine-year high – sales grew 58 per cent, with revenues in excess of £840 million and pre-tax profits of more than £180 million.

By those measures, it would appear to be worth paying more per share for Ferrari in the immediate term.

However, hopes will be pinned on Aston Martin’s future growth prospects. The business plans to increase production by opening a second factory at St Athan, in Glamorgan, with the first cars set to roll off the manufacturing line in the next couple of years. In recent years, it has also benefited from strong demand abroad, particularly in Asia, and the company plans to open 10 new and refurbished showrooms in China alone.

Aston Martin’s transition towards electric vehicles, with the Valkyrie hybrid model, provides some other reasons for positivity. Even with a product coming in at a £2.4 million price tag, the car was a sell-out, underlining the strength of demand for its vehicles. The business has pledged to become “100% hybrid” by the mid 2020s.

Nevertheless, a curious aspect of this IPO is its timing. While it comes on the back of a very good year for Aston Martin, many economic indicators suggest that the global economy is reaching the late stages of its current cycle. Some commentators point to a downturn in 2020 and, even now, emerging markets are struggling.

A more cynical observer may also point to Aston Martin’s Kuwaiti investors, who bought the business from Ford in 2007 and could stand to make around ten times their original investment.

And, while an extreme example, the financial crisis of a decade ago shows that sales of luxury goods, which rely on a high degree of discretionary expenditure, take a particularly bad hit. Aston Martin, for one, saw the number of its vehicles sold drop significantly from 7,300 in 2007. Roll forward ten years and the number of units sold has failed to surpass that peak.

Aston Martin appears to be moving in the right direction – but there are still risks. Increased production can be a double-edged sword for a name of such cachet: more cars on the road could dilute the brand’s value. Even so, it has carved out a solid position for itself in the attractive high-net-worth market and some investors will no doubt spy an opportunity to own part of an iconic British brand.