Aston Martin's DBX Will Prove Its Luxury Chops

(Bloomberg Opinion) -- Aston Martin Lagonda wants investors to think of it as a British Ferrari NV. In its short life as a public company, James Bond’s preferred vehicle provider has indeed mirrored its Italian competitor, although not in a good way.

Ferrari’s shares sagged badly in the months following its 2015 IPO but more than quadrupled in the two years that followed as it delivered consistently good earnings and cash generation. Aston Martin’s stock has dropped 20 percent since its October listing, in line with a selloff in the broader luxury sector. So will it rebound again like Ferrari? Shareholders will need more proof than Aston Martin provided on Thursday.

Its first set of figures as a public company demonstrated very impressive revenue growth, including in China where other carmakers are struggling. But profitability is far less racy than at Ferrari. Aston Martin delivered a 19 percent Ebitda margin for the quarter, whereas Ferrari consistently exceeds 30 per cent on that metric.

Even that level of profitability at the British company is only possible because of some pretty serendipitous accounting. Aston Martin would report losses if it used so-called GAAP accounting rules, which prohibit the capitalization of most R&D spending. Instead, it’s able to capitalize almost all of those costs under IFRS accounting, and does so.

While the company delivered positive free cash flow in the July to September quarter, this was helped by comparatively low capital spending. Capex demands will increase toward the end of the year, at the same time as the company has to book most of the almost 50 million pounds ($64 million) of IPO-related cash costs.

Ferrari has shown that a metal-bashing carmaker can be valued like a luxury handbag maker such as Hermes International. But Aston Martin needs to answer several questions before it can claim similar treatment. For example, is the dependence on special vehicle deposits to fund the business sustainable? Aston Martin doesn’t disclose the figure, but I have estimated that it must be well over 200 million pounds

And is the reliance on Germany’s Daimler AG for its high-tech electronics and engines a sign of admirable capital efficiency and guarantee of reliability, or an unhealthy lack of independence? Above all, can a small sports-car manufacturer increase its sales volumes massively by delivering its first sports-utility vehicle – the DBX – without a hitch in 2020? “In the plan to make Aston profitable, almost everything rests on… the DBX SUV,” Bernstein Research’s Max Warburton wrote in a note to clients.

Judging by chief executive Andy Palmer’s comments on Thursday, the DBX is proceeding to plan and has overcome some of its more significant obstacles. However, he conceded some of Aston Martin’s suppliers were already straining to keep up with expanding demand for its existing sports cars. Aston Martin’s supply chain challenges might worsen if Brexit causes bottlenecks.

Palmer’s team has shown it can do a lot with pretty meager resources, while the pace and quality of recent car launches has been strong. Even so, investors won’t know for several more quarters whether Aston Martin can gallop alongside the prancing horse.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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