Watching James Bond movies, you'd think British spies are all fast-living and stupendously wealthy. The reality is more prosaic. It's similar with 007's carmaker of choice: Aston Martin Holdings Ltd. Look beyond the immaculate paint job and eye-watering price tag of its luxury sportscars—the Valkyrie hypercar costs about $2.6 million—you'll find a bit of a shoestring operation. That's probably no bad thing for potential investors.
Once owned by Ford Motor Co. and now under Kuwaiti, Italian and German ownership, 1 Aston Martin lost money for years. But undaunted by Brexit, 2 new chief executive Andy Palmer plans at least one new model for each of the the next seven years. He's building a new plant in Wales to boot.
It sounds like a recipe for more financial disaster—Aston Martin has been insolvent several times in the past century—and yet it might work this time. The new DB11, its flagship model, has helped lift sales by more than 80 percent, according to nine-month figures published this week, and there's a chance the company will break even on free cash flow this year.
Aston Martin makes a virtue of doing lots with very little, because it's had no choice. Vehicle sales have fallen by half since a 2007 peak, with just 3,700 sold last year, in part because the Kuwaiti owners lacked funds to invest in new models. Net debt was almost four times Ebitda at the end of 2016. 3
The brand has similar cachet to Bentley, Bugatti and Porsche, all owned by Volkswagen AG, but a fraction of their resources. VW has 25 billion euros ($29.6 billion) of cash and equivalents, Aston Martin just 70 million pounds ($93 million).
Car industry investment is rising because of emissions regulations and technical advances like automated driving. So generating cash is imperative for Aston Martin, particularly if it wants an IPO. Under Palmer, it seems to have found several ways of doing that.
Some are simple: Aston Martin has doubled average selling prices since 2007 and kept costs down by sourcing engines and other technology from Ford and Daimler AG, all while refinancing debt. Adding a new car such as the DB11 is expensive, but building subsequent models becomes cheaper because they share systems and components. Boosting capacity utilization spreads fixed costs across more vehicles, helping profit.
As for special editions, they almost pay for themselves. Besides the Valkyrie, there's the 1.5 million pound DB4 GT, which looks like the 1963 original. To buy these cars, customers must pay a deposit several months or even years ahead of delivery. This funds the working capital needed to build them. Aston Martin's new Welsh plant, where it hopes to start building an SUV in 2019, won't consume that much capital either because the site's been acquired via a sale and leaseback.
True, the company hosts fancy launch events, sponsors the Red Bull Formula 1 team and pays for movie product placement to keep Bond in its cars. But it spent a modest 21.5 million pounds on marketing last year, whereas Volkswagen spends more than $6 billion yearly on advertising, according to one estimate.
Then there are non-car projects. You can can buy Aston Martin-branded products from Miami condos to $4 million submarines or powerboats. Yet the carmaker isn't footing the bill. In 2009, it sold the rights to license the brand for non-automotive purposes, leaving partners to shoulder the financial risk.
Most of the income from these spinoff ventures goes to the company's owners, who may want to think about directing some of it to Aston Martin itself if they want to convince potential investors that it's more than just a carmaker, in a similar way to Ferrari NV.
Still, the owners should probably wait a few more quarters before trying to sell stock. Ferrari shares have surged since its 2015 listing, raising hopes of a giddy valuation for its British rival. But Ferrari sales barely declined during the last recession, suggesting profit is quite resilient. Aston Martin didn't have any earnings until recently.
Its nascent return to form shows you can go a fair distance with some classic British tinkering, but building a solid financial track record takes time.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Aston Martin is owned by European private equity fund Investindustrial and Kuwaiti companies Ivestment Dar and Adeem Investment Co.. Daimler AG owns a 5 percent stake
Aston Martin sources engines and other components from the continent which become more expensive if sterling slumps. It also sells almost one fifth of its cars in other EU member states.
It's since fallen to around 2.4 times as ebitda has improved