For Aston Martin, the obvious word association question generates replies like British traditional quality and mythical secret agent James Bond, while for Ferrari it is Italian style and screeching, bright red Formula 1 racing machines not coming in first.
So why are Ferrari shareholders laughing all the way to the bank, while Aston Martin’s are wondering what happened to all the high ambitions which persuaded them to value the British luxury sports car company at 4.3 billion pounds ($5.2 billion) last October, only to find this has dived to just over 1 billion ($1.2 billion) now?
Since Ferrari was spun off from Fiat Chrysler Automobiles in January 2016, it has confounded doubters who said it was valued more as a top-class luxury brand like Hermes than a vehicle manufacturer. Since then it has reported relentlessly improved profit margins and a stock price to match.
Meanwhile Aston Martin Lagonda (AML), to give it its full name, has gone from bad to worse. In the first half of 2019 it reported a 78.8 million pound loss, compared with a 20.8 million profit in the first half of last year. The shares were first offered at 19 pounds ($23) in October. Currently they are quoted at just under 4.50 pounds ($5.50). There was a profit warning in July, and it cut its production forecast for 2019 to between 6,200 and 6,500 vehicles from 7,100, while Moody’s Investors Service downgraded its debt soon after.
“AML’s weaker performance in 2019 raises the stakes for a successful execution of the upcoming SUV DBX launch. Also given the ongoing weak and competitive market environment, Moody’s now considers it unlikely that leverage and free cash flow will be in line with (its previous) rating by 2020,” Moody’s analyst Tobias Wagner said in a report.
And investment bank Credit Suisse this week downgraded its rating to Neutral from Outperform, saying that after the profit warning it had cut its sales and profit forecasts for 2019 and 2020. It worried that if the economic environment deteriorates, Aston Martin might have to borrow money.
Credit Suisse agrees that the launch of the DBX is key to Aston Martin’s future.
“The DBX is expected to deliver a more diversified customer base and a global audience that was not reached with the previous models,” Credit Suisse said.
The DBX, to be launched early next year, will have to be some vehicle to compete in the high end of the SUV market which already includes the Bentley Bentayga, Rolls Royce Cullinan, Lamborghini Urus, and soon the Ferrari Purosangue. There is plenty of competition too from upstart “cheap” pretenders like the Range Rover Overfinch, Maserati Levante and high end versions of the Audi Q8, BMW X8 and Porsche Cayenne.
Credit Suisse said the Urus is probably the closest competitor to the DBX and Lamborghini has currently sold out all its annual production of about 4,500.
“Aston Martin is stronger in China – one of the core markets for luxury SUVs – than Lamborghini and we believe the targeted average (sales) of 3,850 a year is achievable, and pricing for these models should be very solid,” Credit Suisse said.
“Compared with the expansion into electric vehicles (with the Lagonda brand) and mid-engine sports cars, we believe the SUV segment offers the best risk-return profile by far,” according to Credit Suisse.
Moody’s also think the 150,000 pound ($180,000) DBX is the key to Aston Martin’s turnaround.
“Despite the weakened performance in 2019, the company will return to visible growth in 2020 on the back of the DBX launch and its currently adequate liquidity profile. We note that the rating and outlook do not incorporate the impact of a potential “no-deal Brexit” or future trade barriers such as tariffs, which could lead to negative implications for outlook and rating,” Moody’s Tobias Wagner said.
One reason for Aston Martin’s problems that isn’t shared by Ferrari is its high dependence on the British market, currently undergoing a fit of the vapors ahead of the planned Brexit on October 31. Auto makers are desperate for this to be sorted, because they have found it very difficult to invest for the future when many details of what is likely to happen are unknown.
Despite the obvious problems though, most analysts seem to think Aston Martin will make it through its current crisis and establish itself as a serious player, but perhaps not with the luxury level share price established by Ferrari. One ominous factor points to a negative future. Hedge funds have been taking short positions in Aston Martin’s debt and equity, betting on its failure.
Private equity firm Investindustrial owns 34% of Aston Martin, while Mercedes-Benz parent Daimler has a 4% stake. Mercedes makes some Aston Martin engines.