ARGGY - Aston Martin Has 9 Lives

2023-09-08 09:49:28 ET

Summary

• Aston Martin has a history of bankruptcy but is now on the path to recovery with the help of powerful partners.
• Lawrence Stroll, a Canadian billionaire, is leading the revival of Aston Martin and has secured investments from Saudi Arabia's Public Investment Fund and Chinese car manufacturer Geely.
• Aston Martin's partnership with Formula 1 and its improved sales and financial performance indicate a promising future with significant upside potential.

Like Egyptian god Atum-RA, British luxury car company Aston Martin (ARGGY) has become the embodiment of nine lives in one form.

Over the course of its 110-year history, Aston Martin has gone bankrupt seven times. In October of 2018, a private equity group took it public at a very inflated price. The stock price fell right from day one to hit a bottom below 100 pence (1 pound) four years later. Since then, things have stabilized. The stock is now trading around 350 pence and seems well on its way to recovery. This ninth reincarnation might very well be the good one.

Powerful Partners

The Canadian billionaire Lawrence Stroll is the force behind this new resurrection. He is the latest entrepreneur trying to revive the iconic brand so closely associated with the James Bond franchise. Stroll's vision is one of ultra-luxury built on a coalition of powerful players with deep pockets and the best experts money can buy.

In January 2020, Stroll led a consortium that paid 182 million pounds for an initial 16.7% stake in the company. A rights issue added another 318 million pounds to the company's coffers and gave Stroll control of around 25% of the company. However, this substantial cash injection did not suffice. Aston Martin was hemorrhaging cash. More money and expertise were needed to turn the business around.

In early 2022, Lawrence Stroll convinced Saudi Arabia's Public Investment Fund ((PIF)) to inject £78 million for some equity, which, together with a £575 million separate rights issue, allowed the Saudis to accumulate 17.7% in the company's capital. In September of the same year, Chinese car manufacturer Geely (0175:HK) took a 7.6% share which they increased to 18% a year later. With the Mercedes-Benz Group (MBGYY) (DAII:GR) already owning roughly 9%, Aston Martin is now backed by a formidable group of strategic shareholders.

Meanwhile, armed with cash and a clear vision, Stroll is busy snapping up the technology and the best people. To prepare for the EV revolution, Stroll recently concluded a tie-up with the Saudi-backed Lucid Group (LCID). Former Ferrari ( RACE ) boss Amadeo Felisa became CEO in April 2022, and he named former Ferrari and Bugatti Rimac executive Paul Thomas to the newly-created position of Battery Electric Vehicle chief engineer. But his most spectacular hire was Fernando Alonso, a two-time world champion and one of the best drivers in Formula 1 history.

Formula 1: A Great Marketing Tool

Stroll is a car lover. Prior to acquiring Aston Martin, he already owned a Formula 1 team, which he naturally renamed the Aston Martin and added the sponsors Aramco and Cognizant to the official team name. The combination of a revamped luxury car manufacturer and a Formula 1 team makes a lot of sense. F1 is watched by hundreds of millions of passionate fans around the world. It is a very glamorous sport that Americans are finally embracing thanks to a popular Netflix series. We now have three F1 Grand Prix events in the USA, with the one in Miami rivaling the Super Bowl as a high-profile event where anyone who is anyone needs to be seen. Owning a Formula 1 team is a tremendous marketing tool, especially given Aston Martin's promising 2023 results on the track. The team has seen spectacular improvement this season. Alonso has finished many times on the podium; at mid-season, he is ranked third. He trails the two untouchable Red Bull drivers but leads the formidable Mercedes, Ferrari and McLaren teams. That is a major turnaround for a team that was previously stuck at the bottom of the pack.

The aging Alonso's spectacular comeback with a resuscitated Aston Martin car is one of the great stories of the 2023 season. As Lawrence Stroll stated recently: "Our relationship with Formula One is truly transformational", adding that it was attracting an "entirely new generation of Aston Martin customers".

The Ferrari Business Model

The business model of using Formula 1 to attract excitement to the brand is obviously inspired by Ferrari, one of the most successful luxury brands in history. Ferrari's prestigious image was built around fast, beautiful and racy cars. Over the years, Ferrari has won the most famous races around the world, including the 24 Hours of Le Mans. However, Formula 1 is the pinnacle of the sport and winning a Grand Prix is the ultimate statement of success. Image is everything. Aston Martin's ambition is to become the "British Ferrari" by combining James Bond glamor and British esthetics with performance and success.

Business Prospects

So much for the luxury sport image and investments in racing cars. As noted earlier, Lawrence Stroll has similarly made large investments in technology, partnerships and the development of new models. All this is coming to fruition and Aston's numbers are starting to show it. On the commercial side, sales of the SUV and their hyper-luxury cars have picked up nicely. Thanks to the success of the DBX 707-the most powerful luxury SUV in the world-Aston's H1SUV sales increased a healthy 10% YoY to reach 2,954 cars. Aston's Valkyrie model, which goes for a cool $3,000,000 before customization, notched sales of 38 units, up from 27 the previous year. Only GT/sports car volumes were down, likely because would-be buyers were waiting for new launches in the second half of 2023. The order book for the new models is very strong, according to Stroll. Geographically, the Americas saw a jump of 48% in unit sales. Europe, Middle East and Africa rose 36%. Asia Pacific sales are still low, but management believes there is big potential there for the future. Revenues were up 25% at the end of the first half. Gross profits rose 26% in spite of inflation of manufacturing costs and some residual post-COVID logistics problems. The previous year's pre-tax operating loss was cut by half. Debt was reduced by 33% to 846 million pounds sterling. Management forecast a positive cash flow in the second half of the year and total sales of over 7,000 units for the full year. Huge Upside Potential

With numbers like these, the risk/reward ratio has improved considerably. With a much reduced downside risk, Aston's upside potential looks particularly interesting. Consider Ferrari's market capitalization of $59 billion compared to Aston Martin's $3.5 billion. If Aston Martin manages to build on its recent success and achieve continued growth in units and pricing, today's Enterprise Value to Sales multiple of 2.34 will look cheap. Over time, a multiple closer to Ferrari's 10.5 may be more appropriate.

Hervé van Caloen, CIO

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Disclosure : Mercator Investment Management is the Investment Advisor to The Mercator International Opportunity Fund ( MOPPX ) which has 2.94% of its assets invested in AML:LN.

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