Difficult trading conditions persist for Aston Martin (LSE: AML) as today it reported a loss of £10.1m in the third quarter of 2019, which brings the loss for the year-to-date up to £72.9 million. Share prices are down by about 3% for the day.
Fewer cars have been sold so far this year compared to 2018 (3,939 vs. 4,075) and revenues have shrunk by 7%. The overall UK and European markets were said to have been soft, with sales there declining by near 20% over the year to date. Although double-digit growth was seen in the US and China, Aston doesn’t sell many cars there at present.
Aston needs to sell more cars, but it seems to be at a crossroads.
An Aston is not a Ferrari
Aston went public in 2018. It sold 6,441 vehicles that year bringing in £1.097b in revenues and generating an operating profit margin of 13.4%, which beats most car manufacturers comfortably. However, Aston is not just another car manufacturer. In 2018 its average operating profit per car sold was, at £22,822, more than a lot of other cars cost to buy, and its cheapest model will set you back around £120,000.
Ferrari made an average operating profit of £71,000 on the 10,000 vehicles it sold in 2018. On £3.01b in revenues, it delivered an operating profit of 23.5%. The cheaper Portofino costs £164,000. Aston plans to increase production to 14,000 vehicles over the medium term so they appear to be close competitors, but they are not. Ferrari has a superior brand value and a different clientele.
Ferraris are bought by people who are not affected by economic slowdowns. Some Aston Martin customers would never take their Aston on a track day because they could not afford to shell out for a £20,000 replacement part for their only car. These people are affected by economic slowdowns, so Aston needs more worldwide customers.
It’s not a Porsche either
On average each of the 300,000 Porsches sold in 2018 generated £12,100 in profits, and the enterprise runs on an operating profit margin of around 17%. The Porche 718 Cayman costs a little under £50,000, but prices climb over £250,000 as you ascend the range.
Aston is not part of Volkswagen like Porsche is. It can’t spread development costs across as broad a range of vehicles, and deliver high operating margins even if it targets the lower end of the market to sell as many cars as Porsche does.
Turning a corner?
Aston Martin does not have the pricing power of Ferrari, nor quite the same customers, yet its price points are similar. It does not have the volume or operating efficiency of Porsche to compete at the lower end of high-performance, either.
Its plans are to push further into China and the US and go into the SUV market with the DBX, which the public will get their first glimpse of in Beijing and Los Angeles towards the end of this month. Production will start sometime in 2020.
Shares are sitting around 405p, down from a post-IPO price of 1,600p. Fourth-quarter sales are normally good for Aston, and there is a Bond movie out next year, but I want to see what kind of reception the DBX gets before I call this stock cheap, because Aston has chosen to try to sell more cars to customers that could buy a Ferrari and others that are not quite rich enough.
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James J. McCombie 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.