Should You Bond With Aston Martin's $6B IPO?

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Includes: RACE
by: Cohan Chew

Summary

Aston Martin has filed for bankruptcy seven times.

Car industry is turning towards SUVs and electric vehicles.

Brexit and potential US tariffs will impact the British company.

Ferrari's share price went up 163% since its IPO.

Aston Martin posted first year of profit for a decade in 2017.

Aston Martin, now trading on the London Stock Exchange under ticker ASTM, has gone public at around £20 per share, giving the company a valuation of around $6 billion. At a time when the market is leaning towards electric cars and SUVs, with a British economy riddled with uncertainty, should the James Bond luxury car maker be on your radar?

What the car market is telling us

Automakers have been noticing an increase in demand for SUVs. LMC Automotive is predicting 90 SUV and crossover models in 2023's auto market compared to 65 in 2017.

Consequently, car manufacturers such as Toyota, BMW and Mercedes that already have SUVs will be developing and expanding upon their range. Even Italian supercar manufacturers Lamborghini launched its first main-stream SUV this year.

Additionally, as consumers become more eco-conscious, the demand for electric vehicles is on the rise. The International Energy Agency forecasts an increase from 3 million electric vehicles currently on the road to 125 million by 2030.

What it means for Aston Martin

Whilst James Bond is a fictional character, the British secret agent's main choice of car for the past 50 years speaks volumes about the brand. Aston Martin is synonymous with style, luxury, elegance and affluence. Not as extravagant or ostentatious as Italian rivals Lamborghini or Ferrari, and not as formal or elite as Rolls Royce, Aston Martin sits in more of a distinguished and refined position.

Sadly, this is not great news for conforming with the way the market is trending. Bulky SUVs and silent electric motors are more than a stone's throw away from Aston Martin's heritage.

In the short run at least, SUVs are in high demand. Although Aston Martin recently believes its upcoming SUV will be its top seller, the vehicle will face fierce competition. Luxury car rivals Porsche, Bentley, Rolls Royce, Maserati and Lamborghini already have vehicles in the space, and Ferrari will be releasing theirs soon.

In terms of embracing electric technology, luxury car makers Aston Martin will eventually have to play ball. For the near future, government-imposed energy taxes are easily passed on to opulent consumers. However, in the long run, all car companies will need to prepare for alternative fuel technology. The fact that the market is showing an increase in demand for electric vehicles should be an incentive for Aston Martin to consider developing the technology. Aston Martin's 2019 Rapide E is already a step in the right direction.

The SUV and electric car market lift luxury sports car makers out of their comfort zone. Retaining their own iconic styling whilst adapting to different vehicle classes is a tough task and steers away from these luxury car manufacturers' heritage.

Additionally, Aston Martin currently has a poor history of adapting to different car classes. After creating the somewhat questionable Cygnet to enter the hatchback market, Aston Martin quickly scrapped the car in 2013 after (predictably) weak sales.

Of course, Aston Martin may very well be successful in the SUV market and could develop technology that gives Tesla (TSLA) a run for its money. At the time of the IPO, there's no way of telling as neither an SUV nor an electric car has been produced by the company. All investors know for sure is that Aston Martin has huge challenges ahead of it that will require restructuring.

Brexit and tariffs

The uncertainty of Brexit is continuing to cause British companies a great deal of anxiety. UK manufacturers are cutting jobs and banks are preparing for negative impacts. As we all know, the stock market hates uncertainty and investors would not be deemed unreasonable for steering clear of British companies during this period.

However, if you believe Aston Martin's CEO Andy Palmer, Aston Martin won't take the brunt of Brexit, no matter the result. According to Palmer, Aston Martin exports 25% of its cars to the EU and sells 30% to the UK. If a hard Brexit were to occur, Aston Martin would expect to see a decline in its exports but its competitors would also see a decline in their exports to the UK. What's more, a weaker British pound would increase profitability for the company. The CEO remains confident that Aston Martin will come out strong irrespective of how hard a Brexit the UK has.

It is also worth bearing in mind that luxury items are the most resilient to tariffs as clientele in that price range are less affected by marginal price increases.

Additionally, Aston Martin plans to "double down" on sales in Asia by vastly increasing their sales plan.

Having said that, Palmer did admit that many of Aston Martin's physical components required in their vehicles are imported from Germany. Profits were also reportedly hit by currency volatility, despite what Palmer claims.

Just like the uncertain success or failure of an Aston Martin SUV or electric car, Brexit brings about even more uncertainty to the British manufacturer. Even if Palmer is right and Aston Martin is in a privileged and unique Brexit-proof position, uncertainty is an investor's worst nightmare.

The Ferrari model

Italian supercar manufacturers Ferrari (RACE) have seen incredible results since their IPO in 2015. Since its IPO, Ferrari's stock price has seen gains up to 163%. Ferrari is valued at just over $25 billion whilst Aston Martin is expected to enter the market at $6 billion.

Although the Italian car makers earn more money than Aston Martin and see more action in their cash flow, 163% growth in their stock price over 3 years suggests that the demand for luxury sports cars is certainly not slowing.

Aston Martin's Chief Financial Officer Mark Wilson said the company had Ferrari's valuation in mind when making theirs. “Clearly there’s a great comparator out there and it’s Ferrari,” Wilson said. “We’re going for a premium listing.”

However, likening Aston Martin to Ferrari might be somewhat foolish. Whilst Ferrari has been incredibly profitable over the years, Aston Martin only posted its first profit in a decade last year. What's more, the company has filed for bankruptcy seven times over its 102-year lifespan. Figures in December also showed the company had £570 million of long-term debt.

For an investor looking for a luxury sports car manufacturer, Ferrari still seems like the no-brainer in comparison to Aston Martin.

Conclusion

Aston Martin has claimed their share offer has been fully subscribed already. After years of turmoil, the British car company is finally stable and profitable under CEO Andy Palmer. Brexit, tariffs, SUV and electric car demand are obstacles in Aston Martin's path. How the company capitalises on these obstacles will dictate its future success. Nonetheless, Ferrari has proven that manufacturing premium cars to meet demand is a sustainable business model, if done correctly.

For me, there is too much uncertainty surrounding Aston Martin to jump in at its IPO but it will certainly be on my watchlist.

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.