Could the Aston Martin share price surge higher than the FTSE 100 after its IPO?

Does the Aston Martin IPO offer investment appeal versus the FTSE 100 (INDEXFTSE:UKX)?

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There has been a significant amount of hype surrounding the decision by Aston Martin Lagonda to move ahead with an IPO. Clearly, it is a much-treasured UK car company which produces some of the finest luxury cars in the world. And in recent years it has enjoyed a resurgence under its current management team, with its financial performance having improved significantly due in part to a revised strategy.

Looking ahead, though, is there a danger that investors will allow their hearts to rule their heads when it comes to investing in the company? Or does Aston Martin have a realistic chance of beating the FTSE 100 after its IPO?

Optimistic outlook

The performance of Aston Martin in the first six months of the 2018 financial year has been encouraging. The company has delivered a 14% increase in adjusted EBITDA (earnings before interest, tax, depreciation and amortisation), with it on track to deliver between 6,200 units and 6,400 units for the full year. It anticipates an adjusted EBITDA margin of around 23% in 2018.

Looking ahead, the company is aiming to deliver significant improvements in its financial performance over the coming years. For example, it is targeting the production of between 7,100 units and 7,300 units in 2019, with this figure set to rise to 9,600 units and 9,800 units in 2020. Over the medium term, it is aiming to produce 14,000 units annually, which would represent an increase of 122% from its forecast production for the 2018 financial year.

In terms of profit growth, the company anticipates an adjusted EBITDA margin of greater than 30% in the medium term, as fixed-rate costs are spread among a larger number of units.

Investment potential

If Aston Martin is able to deliver on its ambitious targets over the medium term, then the company could see its valuation increase. It may prove popular among investors in any case, due to its strong reputation in the UK in particular, and this may lead to improved investment sentiment over the coming years.

However, the reality is that its growth targets seem to be highly optimistic, which means the risk profile of the business may be relatively high. Its growth outlook may be positive at the present time, and growth could be delivered in the near term as per its targets. But the automotive industry is notoriously cyclical, and an end to the current economic boom could put its growth targets under pressure.

Moreover, with the industry transitioning towards an electric future, there is a danger that smaller, niche operators may be less able to adapt to a fast pace of technological change. This could hold back their growth appeal during a period when consumer tastes are rapidly evolving.

Therefore, while Aston Martin is a superb brand which has done extremely well to turn its performance around in recent years under its current management team, there may be better options elsewhere for investors looking to beat the FTSE 100.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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