Aston Martin (LSE:AML) shares entering the FTSE 100? Let me be clear, I don’t see that happening in the next 12 months. But I do see a strong investment case for the firm and some clear evidence that this carmaker could receive a much higher valuation in the coming years, thus elevating it to the top 100 firms one day.
Here’s why.
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Ferrari and luxury valuations
Stocks in luxury sectors tend to trade with high multiples. For example, Hermès trades at 63 times earnings. By comparison, Apple, the world’s largest listed company trades at 29 times earnings. Meanwhile, FTSE 100 stocks have an average price-to-earnings of 14.
Why is this? Well, luxury goods are big business. But there are several reasons why investors like it. The margins are often huge. Demand can be inelastic. And demand could grow organically in the coming years as global populations become wealthier.
When it comes to luxury vehicles, we can see that Ferrari trades at a premium to its less luxury peers. The Italian sports car maker trades for 50.8 times earnings. It currently has a market-cap of €52bn. This would make it the 14th biggest company on the FTSE 100.
How does Aston compare to Ferrari?
Aston currently has a market-cap of £1.82bn, meaning it’s around 25 times cheaper than Ferrari. While the company isn’t profit-making at this moment — it’s very much a firm in transition.
Chairman Lawrence Stroll has ambitious plans for the iconic car brand. He wants to achieve £2bn in revenues and £500m in adjusted EBITDA by 2024/25 through the sale of 10,000 cars a year, up from 6,412 in 2022.
In a recent update, Aston suggested these financial targets could be hit by selling just 8,000 cars, reflecting a focus on higher margin vehicles.
By comparison, Ferrari sold 13,221 vehicles last year. The manufacturer has outstanding margins, earning an astounding $106,078 per unit sold in 2021.
The point is, if Aston is able to hit its targets, while managing debt, we should expect the company to trade a premium similar to that of Ferrari. But it won’t happen overnight.
Trading on the FTSE 100?
If we assume that Aston could one day trade at 50 times earnings, the company would only need to register annual profits of £80m to make it onto the FTSE 100. That’s because the smallest company on the index currently has a market-cap around £3.9bn. And 50 times £80m would take us to £4bn.
The only problem is, it may take time for Aston to turn things around. EBITDA isn’t the same as profit and interest expenses in 2023 are expected to come in at £120m.
It’s also worth noting that not all luxury brands trade at such premiums. Porsche — admittedly not in the same echelon as Ferrari and Aston — trades for just 4.3 times earnings.
However, in my view, Stroll has certainly got Aston on the right track. And I doubt the performance of the Aston Martin F1 team — also owned by Stroll — will do the brand any harm moving forward.
