Aston Martin: Dealt Great Cards Now They Need To Play The Hand Better

Summary

• Aston Martin recently reported disappointing Q1 results, continuing the share price free fall.
• Aston Martin shares are now down 94% since IPO, leaving many to wonder when it will find its floor.
• AML still have a strong brand with good fundamental assets.
• The Board must focus on re-balancing supply.

Aston Martin (OTCPK:ARGGY) has just parted company with CEO Andy Palmer on 26th May. This is perhaps no surprise as the shares have fallen from £19 on float to lows of 35p, destroying 94 percent of shareholder value along the way. The New Executive Chairman has swept a new broom but i believe that the new CEO (set to be Tobias Moers from Mercedes) has a set of great cards to play and it's now down to them to play the hand well.

Aston Martin recently reported their 1st quarter 2020 results, which disappointed the market and follows the long trend of continued distress and destruction of equity holder value seen since their IPO price of £19 a share back in 2018. Aston Martin's share price performance is something you would associate with an AIM (Alternative Investment Market) listed mining company that falls short of expectations rather than a well-established, main market British car manufacturer with 107 years of history.

On IPO Aston Martin had an evaluation of £4.3 billion. Even after falling 94% Aston Martin's valuation still stands at £580 million due to new equity raises they have had since IPO, most recently from Lawrence Stroll the Canadian Billionaire best known for his investments in Michael Kors, Tommy Hilfiger and the Racing Point Formula 1 team. Aston Martin raised a total of £536 million of new capital with a placing of 25% of equity to Lawrence Stroll for £171 million. He has also taken up the position of Executive Chair. This valuation means Aston Martin still has plenty of room to fall if they keep falling short of market expectations (particularly with their large, increasing debt load of near £1 billion). It is crucial for Aston Martin to start to show signs of becoming a profitable entity again in the near future and I believe they have the ability to do that if they play their cards right.

Source: Hargreaves Lansdown - Aston Martin 1 year graph

Studying Aston Martin's Q1 results, there is no sugarcoating that the results were poor, yet again. Q1 results showed Lawrence Stroll that Aston Martin will by no means be a quick turnaround and will take a large amount of work for it to come good. They reported car sales of 578 in the quarter, nearly halving from the same period in the prior year. Revenues fell off a cliff down 60% to £78.6 million. Broader UK market car sales crashed 97 per cent in April, the month after these results, meaning that Quarter 2 sales are likely to be even worse. UK car sales for March were only 44% lower, making it seem likely to get worse for Aston Martin when it announces Q2 results before it gets any better. The leading UK vehicle sales for April were actually vans, followed by Tesla vehicles where Tesla were fulfilling pre-ordered vehicles on long waiting lists.

One of the primary issues facing Aston right now is that storage facilities and dealerships across the countries are full of Aston Martins and that means that supply is far exceeding demand. Prior to their float in 2018 Aston Martin shipped huge numbers of cars into their dealerships and booked them as 'pre-registered sales' increasing revenues and profits as a method to support the float. This has since come back to haunt the company as demand from dealerships for new vehicles has sunk due to the inability to shift the older cars. Executive Chairman Lawrence Stroll did highlight this issue in their Q1 report and argued that the company is addressing the problem:

My immediate priority is to re-balance supply and demand, reducing dealer stock. Although nearly all our dealers are compromised and our factories were closed, we are focused on achieving results and delivering our plan. We have made very good progress very quickly, with dealer inventory down 428 units in just one quarter, more than double the level achieved in the whole of 2019.

The overstock at dealers has led to deep discounting on the dealer stock cars and Astons are reputedly available to lease in the UK for £500 per month. That puts them at the lease price of a higher end Mercedes or BMW and does not position the brand against Ferrari, which is where CEO Andy Palmer aspires to be.

At the same time Aston Martin has many things in its favor and it is up to the new management team to play these cards well.

In terms of assets and investment to date, Aston Martin inherited a £1 billion factory at Gaydon, Warwickshire which sits adjacent to the Jaguar Land Rover factory and used to be part of the same group when they were both owned by Ford. It was Ford who made this huge investment into Aston Martin's production facilities and this factory is well maintained and still very modern. Add to that a new state of the art factory in Saint Athan, Wales which has been heavily subsidized by the Welsh government keen to create jobs over the border from England, The new facility will be used for Aston Martin SUV production, commencing in 2020. This facility was highly lucrative for Aston Martin due to the £18.8 million worth of grants given from the Welsh government. Welsh ministers bought the factory's ex-air force base site for £6.3 million and added further pledges to Aston Martin including £5.8 million up front to attract them to Wales in return for supplying the local economy with 750 jobs. This factory combined with the Billion pound Gaydon factory that Aston Martin obtained from Ford back in the early 2003, means that Aston Martin has the advanced technology and capability of continuing to create and manufacture some of the leading sports cars in the future. And make no mistake, Aston Martin does design and make beautiful cars.

The launch of the new SUV (the DBX) is going to be one of the key turning points for Aston in driving future sales and the company plans that SUVs will make up 50% of its future annual sales. This strategic move, the development of the first SUV ever in Aston history, is driven by the global success of the SUV variant and the fact that the Benley Bentayga and Porsche Cayenne are the best selling models within those luxury car brands. Even Ferrari is planning a new SUV with the launch of the Purosangue in 2021. Sadly for Aston its Spring 2020 launch of the SUV was seriously affected by the cancellation of the major spring auto shows, notably the Geneva Motor Show in Switzerland which is Europe's largest annual car show and would have been a great opportunity for global publicity and pre-orders. But I believe orders can recover with the SUV being a very desirable model that will gather much more publicity later in 2020 and into 2021.

Aston martin DBX set to be released later this year

In the past five years, Aston has also developed a range of seven vehicles with a plan to launch a new vehicle each year on a seven year model cycle. With the well invested factories and 1,000 staff engineers on hand to deliver these projects, so far so good. However, in my opinion Aston Martin, while full of good ideas, has focused so much on the long term future that it has overstretched its financial capital causing it to run out of cash. Over recent years the company has ventured into new forms of technology and development that will have had huge costs but provide no near term value to the company. One example of this is their development of the 'flying car' Volante Vision concept, where a large amount of time and resources will have been dedicated to the development of that idea, which currently will have no end product for the business in the short term. This diversion is truly quite astounding considering that Aston's core business of selling cars and delivering profitability is failing, Aston Martin's board needs to switch back and focus on these and the core business.

Aston also has huge costs related to their brand building in trying to create Aston Martin as a top of the line luxury car maker. However this has contributed to huge losses, without providing much benefit in driving car sales in the short term. Although it does tie into Aston Martin's longer term idea of "global brand building", whereby they may be able to drive higher sales through not just selling vehicles but also selling the brand name. This has had some success as shown by their move into luxury property with their new branded luxury property in Miami. Although Ferrari have been successful in taking this approach, the Italian super car brand has developed this brand awareness over time and now have much Ferrari merchandise across the world. In contrast, Aston Martin has been loss-making since their float and does not have as well-established brand as Ferrari. It may take a long time for Aston Martin to bear the fruits of this expensive marketing strategy.

Another example of the cost of this brand building is the large amounts of money they have plowed money into Formula 1 through sponsorship of the Aston Martin Red Bull F1 team (which many people still associate solely with Red Bull). Aston Martin will now venture and form their own racing team in 2021 following on from Formula 1 team racing point, becoming "Aston Martin Racing", this is made possible through the fact Lawrence Stroll leads a consortium that owns this team. Seeking Alpha author Christopher Liu went into good detail in a recent article over risks and rewards to this strategy.

Aston has a long association with James Bond movies, stretching back to the 1960s when Bond drove a classic DB5 with hidden guns and a bulletproof shield. The new Bond film 'No Time To Die' was set for a summer launch but is now expected to be released in November this year. This could offer Aston Martin equity holders some short term enthusiasm, as it has a history of giving a boost to sales. Andy Palmer Aston Martin previous CEO, highlighted the boost that the bond film could give back in 2019:

A Bond movie is always a boost to us. It very clearly helps us in places like China and the US. One of the things we need to do is improve the familiarity and awareness in the brand. In particular, strange as it may seem, our Chinese colleagues are particularly pleased that our position in Bond is so strong.

Now that Lawrence Stroll is at the driving seat at Aston and will have the last say with what strategic direction they take, he will have to utilize his previous experience in building the Michael Kors luxury brand to help Aston Martin reach their goals in the future in creating Aston Martin as a premium brand and diversifying into new products. However in the short term as he highlighted in the first quarter report, his focus has to be on shifting current Aston Martin cars that remain in dealerships across the globe, with the Bond movie later this year potentially supplying the boost in demand he may need to achieve that. It is clear that Aston Martin is coming to a pivotal point following the coronavirus and they must start to focus and deliver on selling cars and increasing demand, particularly for their new SUV launch that will most likely come in autumn time. If they can focus on the short term sales, the long term may look very rosy.

Conclusion

Overall it is clear that Aston Martin has a lot of strong assets at their disposal; a strong brand presence, state of the art facilities in both England and Wales, and a strong development line. However it is now crucial for the company to stop the over-supply and ensure that the focus is on selling the cars that already remain in the dealerships. Although they have started to make some headroom on this, as dealer inventory was down 428 units in one quarter, there is still a lot of progress to be made in this area and over the short term that combined with the impact of coronavirus will heavily affect the numbers. Although mild progress was made through Q1 results remained poor. I would hold off from entering Aston Martin even though it may provide a short term bounce, I think it is important to see more progress on a potential turnaround and how well the company shapes up post coronavirus before taking a position.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.