Why I’d steer clear of the Aston Martin share price right now

Aston Martin Lagonda Global Holdings plc (LON:AML) may have a shinier future, says Thomas Carr.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Since listing on the London Stock Exchange in October of last year, Aston Martin Lagonda (LSE: AML) shares are currently down by 40%, although they have risen 20% from May’s low. Shares in the only UK-listed car manufacturer have been affected by both the general malaise that is sweeping the global automotive sector, and the high level of investments associated with the current portfolio expansion.

Sales volumes rose by 10% in the first quarter of the year, but a lower average selling price meant that revenues increased by just 6%. There was strong growth of more than 20% in Asia and the Americas, counterbalanced to an extent by lower volumes in Europe and the UK. An operating loss of £3 million for the period reflected a changing product mix, along with a ramp-up in costs associated with investing in new vehicles and the development of a new manufacturing centre in Wales.

The increase in costs is partly a result of the development and production of the DBX, Aston Martin’s highly anticipated first foray into the luxury SUV sector. The luxury car manufacturer hopes that the DBX will appeal to the growing number of high-net-worth individuals across the world. Aston Martin estimates that up to 70% of its customers own an SUV, and along with other luxury manufacturers such as Lamborghini and Bentley, it is focusing on capturing a slice of this increasingly valuable market. Along with a move into the luxury SUV market, AML is also investing in electrifying its product range, by launching a new all-electric brand, Lagonda.

In the short term, the high level of investment in new vehicles, a new manufacturing facility and electric powertrains will continue to depress margins and burn cash. Costs associated with last year’s IPO pushed the luxury brand to a pre-tax loss of £68 million in 2018, with an operating profit margin of less than 7%. The first quarter saw a cash outflow of £16 million, whilst net leverage crept up to 2.6 times EBITDA (earnings before interest, tax, depreciation and amortisation).

Yet management are still expecting an increase in sales volumes of 10% for the year, with an operating profit margin of 13%. In the medium term, AML aims to double car sales to around 14,000 per year, and is targeting an operating profit margin of more than 20%. But the shares are already priced optimistically, I believe. Even when ignoring the costs of last year’s listing, the shares trade at over 30 times last year’s adjusted profit level.

The share price reflects Aston Martin Lagonda’s status as a luxury brand, and takes account of its pricing power and resistance to global economic trends. Along with the strategic investments that are being made, this means that the shares have potential in the long term. However, in the short term investors have to contend with a weak global car market, low profitability, negative cash flow, increasing net leverage, and increasing risks of a no-deal Brexit. On balance, I think the shares are best left avoided for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Thomas Carr has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »

Closeup ruffled American flag representing US stocks and shares
Investing Articles

2 UK stocks that could rise if Harris wins the Presidential election

Royston Wild believes these UK stocks could receive a bump if Kalama Harris wins the Presidency, giving their share prices…

Read more »

Investing Articles

After a 96% plunge, is buying more Aston Martin shares throwing good money after bad?

Just two weeks after buying Aston Martin shares Harvey Jones found himself nursing a painful loss. Yet after recent news…

Read more »

Investing Articles

After crashing 45% in October, should I buy this FTSE 250 share for my Stocks and Shares ISA?

Roland Head explains why he’s tempted to add this risky FTSE 250 turnaround share to his Stocks and Shares ISA…

Read more »