Could this FTSE 250 stock ever rival Ferrari?

This FTSE 250 stock has faced big challenges since listing, but it has incredible brand value and a turnaround could be on the cards.

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FTSE 250 stock Aston Martin (LSE:AML) and US-listed Ferrari (NYSE:RACE) couldn’t be further apart. The British company is worth £1.4bn and continues to make a loss — although a turnaround is hopefully around the corner — while the Italian firm is worth a staggering $78.5bn. This may seem like a sizeable disparity when we consider that Ferrari sold 13,663 units in 2023 — only double Aston at 6,620.

Why so different?

So, why do these companies have such different valuations? Well, Aston Martin is heavily indebted — net debt stands at £814.3m — and is loss-making. Ferrari’s net position is around €1.36bn — that’s larger than Aston but tiny compared to the overall value value of the company.

And Ferrari is profitable. But that doesn’t explain the entire story. Ferrari is trading at a huge 51.5 times forward earnings. Essentially, the company’s modest growth trajectory, huge margins, and brand value count for a lot, giving Ferrari a very premium valuation.

Margins are a large part of the equation. Ferrari has some of the most impressive margins in the business, and a lot of that comes down to its pricing power. Ferrari’s gross profit margin is 49.8% and its adjusted EBITDA margin is 38.2%. These are the margins of a tech firm, not a car company.

In fact, there are some crazy statistics out there to highlight its margin strength. One suggested that Nissan would need to sell 926 vehicles (in 2019) to achieve the same earnings as selling one Ferrari.

Can Aston turn things around?

Aston Martin is still loss-making, and it’s net debt position is challenging, but there are glimmers of hope. The first positive is that Aston’s gross margins have been improving. In fact, they were 39.1% in 2023, up 650 basis points over 12 months. This is really important and its something Executive Chairman Lawrence Stroll had been trying to achieve for some time.

Moreover, the company more than halved annual losses last year, driven by higher prices for its high-end vehicles. Aston’s adjusted pre-tax loss of £171.8m for the year to December 31 was considerably better than the £209m that analysts had been anticipating.

Things are clearly improving. Aston is expected to make a basic earnings per share (EPS) loss of 13.75p in 2024, but the consensus is for profitability to be reached in 2025. The EPS forecast is for 2.07p in 2025 and 9.28p in 2026.

Ferrari2024202520262027
EPS estimates ($)8.389.3210.129.34
Price-to-earnings (P/E)51.546.342.646.2
Aston Martin
EPS estimates (p)-13.752.079.28*
Price-to-earningsn.a.80.217.8

As we can see from the above, I’ve highlighted and compared P/E ratios for the forecast periods. I know Aston has a greater net-debt-to-equity position, but it would trade at a huge discount to Ferrari if the forecasts play out. I find this very attractive.

The bottom line

Forecasts aren’t always correct, and that’s a big risk when investing in companies that are yet to realise their potential. However, I’d suggest car manufacturing is slightly easier to predict that something like tech adoption.

Anyway, I’m considering increasing my position in Aston Martin. It’s an iconic brand and gross margins are improving. In the long run, I could see it trading with Ferrari-esque valuation metrics.

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.

James Fox has positions in Aston Martin. 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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