Aston Martin (LSE:AML) shares are among best performing stocks on the FTSE 350 over the past six months. The luxury carmaker has seen its shares rise 110% over the period.
But I still think the stock could have further to rise. It’s not a short-term thing, but it’s based on Aston hitting its strategic targets for 2024/25.
Let’s take a closer look.
Aston’s strategic objectives
Canadian billionaire Lawrence Stroll set some pretty lofty objectives for his new acquisition a few years ago. He wanted to take a leaf from Ferrari‘s book by focusing on developing margins and increasing output without destroying the brand’s exclusivity appeal. The Italian manufacturer earned an astounding $106,078 per unit sold in 2021.
In real terms, this meant upping deliveries to 10,000 cars a year by 2024/2025, achieving £2bn in revenue and £500m in EBITDA. A few years ago that looked like something of a challenge. It’s worth noting that the 10,000 deliveries figure still looks optimistic given 6,412 vehicles were sold in 2022.
However, March’s annual report demonstrated that the cash-burning business was perhaps turning a corner. For the year, Aston made a £495m loss before tax but registered a narrow operating profit of £6.6m in Q4.
The financial turnaround reflects the movement towards higher margins vehicles such as the DBX SUV and the Valkyrie — Aston Martin’s first ever hypercar which “takes F1 technology to the road“. The Valkyrie starts at over $3m. I can only imagine the size of the margin here.
But it’s not just Ferrari that does this. McLaren has been doing this for a while. There are certainly enough super-rich collectors to make it work.
Valuation
It can be hard to value a company that doesn’t make money yet. Just look at electric car producer NIO and the volatility shown in its shares. In fact, it can be hard enough establishing a valuation for a stock that is making money.
Currently, we can look at metrics such as the price-to-sales ratio, which indicates that the firm is trading at just 1.2 times. That’s not expensive, but it also takes into account the company’s significant debt.
One way we can look at a valuation moving forward is by comparing the stock with peer Ferrari. It sells around 11,000 vehicles a year, and is valued at €49.2bn, at the time of writing. Aston is currently valued at just £1.57bn.
The Italian brand trades at around 51 times earnings — luxury brands tend to trade with high multiples. Using the same ratio, if Aston were to generate just £40m in earnings, it would have a valuation around £2bn. Why £40m? I’m being conservative, based on the operating profit for Q4. But future profits should be higher.
Debt repayments — approximately £120m this year — will drag on profitability, but I think there’s a bright future and I believe the current strategy will start to bear fruit.
I’m also anticipating some positive effects from the company’s F1 resurgence, which is helping develop the brand’s image around the world. Coincidentally, I’m actually in Baku for this weekend’s race. A good performance by Fernando and Lance may well push the stock forward again.
