Aston Martin Lagonda Global Holdings PLC (LON:AML) is a high-risk, high-return bet on what should be a period of strong growth for the luxury high performance sports car sector, analysts at Citigroup say.
“Rapid growth in the number and wealth of high net wealth individuals and relatively constrained supply should mean luxury high performance sports car automotive OEMs are in a unique position to grow earnings over the next five years,” the analysts said in a note to clients on Thursday.
Initiating coverage of Aston Martin with a ‘buy/high risk’ rating, Citi slapped a price target of 600p on the shares, which have crumpled around three quarters to near 400p since the initial public offer at 1,900p in late 2018.
The analysts said they believe Aston Martin’s “brand and strategy is sound” but feel the business has been “left exposed by being left undercapitalized” since the IPO, meaning it now has “pressing” short-term cash needs.
With the shares now trading at a “sharp discount” to sector peers, the Citi analysts “see a potentially high return opportunity for investors even if this does come with a considerable degree of risk”.
Three main bumps in the road for Aston Martin are seen in 2020: a capital injection, the successful launch of its DBX sports-utility vehicle and resolution of problems with its Vantage model, but Citi sees the associated risks as “sufficiently priced in”.
In a blue-sky “bull scenario”, which would require Aston Martin’s discounted cash flow metrics converging with those of Ferrari NV (NYSE:RACE), the shares could even be worth 3,000p, the analysts suggested.
Ferrari stands alone
While the supply/demand dynamic underpin earnings forecasts across the luxury cars sector, “not all brands are created equal”.
Ferrari, which is seen as having the strongest brand in the sector on all objective metrics, was kept on a ‘buy’ rating by Citi, but its target price was raised to €180.
“While we are positive on the sector overall we believe it is important for investors to discriminate between brands.
“Ferrari stands above everyone else and our proprietary data shows that it enjoys superior residual values than other luxury OEMs,” the analysts added, with a strong racing heritage, a larger online presence, lower cyclicality and superior residual values on its vehicles.
“This makes repeat purchasing cheaper for owners but also highlights demand among consumers.”
Shares in Aston Martin were down more than 1% to 427.92p on Thursday morning, while Ferrari was little moved during trading in Europe.