Aston Martin's Vantage Needs a Bit of a Tune-Up

(Bloomberg Opinion) -- A fresh low on Thursday for the British maker of Aston Martin cars, whose shares dropped 18 percent after a disappointing earnings update – taking the fall since its October initial public offering to a not very sporty 41 percent. The company's protestations that everything is going to plan are deaf to a loss of confidence among investors.

To recap, Aston Martin Lagonda Global Holdings Plc is midway through a transformation under CEO and former Nissan Motor Co Ltd. executive Andy Palmer. The strategy involves a complete revamp of the range and seven new models. Each vehicle will feed off the R&D of earlier cars, with any innovations being used in future launches. The vision is of a relatively high-volume luxury carmaker with strong positions in parts of the market where Aston reckons its historic brand and talent for beautiful design will prevail over the competition.

As it makes this shift, financial results are merely indicative. Volumes rose 26 percent last year, pushing revenue up 25 percent to 1.1 billion pounds ($1.5 billion). But Aston made a slight loss after some hefty IPO costs. This is a jam tomorrow story that relies on the belief that Palmer can bring an entirely new range to market and persuade drivers to buy the vehicles. The latest update gave reason for caution on both scores. Supply chain problems disrupted production in the fourth quarter and led to a bunching of shipments in the last two weeks of 2018. Meanwhile, sales of the Vantage sportscar have not been as strong as many hoped in the U.K. and Europe.

Aston has dealt with the supply chain problems and met its overall sales guidance regardless. It's also too soon to judge the success of the Vantage. It has punchy styling and aggressive handling, deliberately targeting younger drivers. The convertible version hasn't come out yet and that might improve demand.

The difficulties are a reminder that Aston's plan carries execution risk. For all the detailed market research, there's no guarantee that new cars will be a hit with buyers. The 2020 launch of the DBX luxury SUV will be critical. Aston reckons there's a gap for a road-hogger that's both opulently roomy and beautiful. This is a pioneering and risky segment.

Then there's Brexit. Aston has set aside 30 million pounds for working capital strains but is assuming – bravely – that demand will hold even after a British departure from the EU and that customers will bear any increased manufacturing costs. We'll see.

Surely this company needs more financial flexibility against disappointments. It didn't raise new money in the IPO. The argument was that its business plan was fully funded. Net leverage on its own definition is 2.3 times Ebitda, which it sees as prudent. But Palmer admitted on Thursday that the launch of the Vantage roadster hadn't taken place earlier because of financial constraints.

With the IPO shares having come solely from selling shareholders, instead of new stock, the free float is small and trading is thin. That may also exacerbate the pressure on the stock.

Maybe Palmer's right and everything will go well from here. But accidents will happen.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

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

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.