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Want to own a piece of Aston Martin? What must be one of the most iconic brands in luxury motoring is attracting a lot of attention as it announces its intention to float on the London Stock Exchange. The reported £5 billion valuation would place it within reach of the FTSE 100 and well within the FTSE 250. And rightly so.

Fancy a bit of Aston Martin shares?

But just because this is Aston Martin does not mean that investors should throw caution to the winds. It looks like owner Daimler is not selling out completely, and that the free float will be relatively limited, which is good. Aston Martin has outlined what it calls its Second Century Plan, a three pillar product plan for the Aston Martin Lagonda which will see seven new models coming out between 2016 and 2022. The plan is to use this model to drive unit volume growth and expand Aston Martin’s profit margin.

Aston Martin is using a secondary sale of shares from existing shareholders and will not be raising money with a new issue. The company’s management team says they will aim to keep debt at prudent levels, at or below 2.0 times EBITDA, by the end of 2018.

Aston Martin shares are a play in the luxury goods market, hence it is worth taking a look at previous luxury IPOs.

“This is where the company’s brand, the quality of its product and the scarcity of its cars come into play, as all three can combine to provide pricing power, which is one of the key reasons investors buy any luxury goods stock (and post-Crisis luxury goods floats such as Moncler, Samsonite and Ferrari have gone well, even if Prada has proved less successful),” comments Russ Mould, investment director at AJ Bell.

In terms of risk factors – buyer beware – Aston Martin has had a chequered financial history and there are some substantial technology shifts coming in the car market, without question. Will Aston Martin be equal to these?

The valuation of the Aston Martin IPO

The valuation of the Aston Martin IPO is likely to attractive. There is a large syndicate of banks running the deal, and they will be looking to price the Aston Martin IPO on a relative basis to Ferrari, which was listed in New York in October 2015. Ferrari has seen its shares climb from $52 to $130, giving it a market capitalisation of $24.5 billion.

Taking Ferrari as an example of what investors can expect from the Aston Martin IPO, the Italian car brand made a net profit of €537 million from a historic PE ratio of 38 times. Consensus earnings per share from US analysts for 2018 is $695 million, which equates to a forward PE of 35 times. By contrasts, Aston Martin made a net profit of £77 million in 2017, so its £5 billion market cap would place it in the region of a PE ratio of 65 times, making it a more expensive stock than Ferrari.

“Under such circumstances, a premium price/earnings multiple relative to Ferrari looks hard to justify, pending further analysis of the balance sheet and cash flow, although Aston Martin does have some aggressive growth targets, with a medium-term plan to more than double volume output to 14,000 units and increases its operating margin to 20%,” observes Mould.

The Armchair Trader says:

Aston Martin is a long term luxury goods play: the company gets good traction in non-European markets, and should still be able to shift cars during a recession, which may be just around the corner. Rather than rushing into an IPO at the end of the longest equity bull market in history, it might be worth taking a wait and see approach with this one. We like luxury brands here and historic performance demonstrates that they have staying power. Aston Martin is a classic brand and will still be in demand 10 years from now, but that’s not the point. You don’t want to be holding these shares when they come off by 30%.

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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