The Aston Martin Lagonda (LSE:AML) share price had been performing well over the past few weeks. After trading around the 50p mark for much of October, the share price hit 80p earlier last week. This would’ve been a tidy 60% return in a very short space of time for any investors that bought in. Unfortunately, the shares took a hit as we closed out the week, and fell 10% on Friday. What’s going on here?
Brexit causing wobbles in Aston shares
The main driver behind this slump is the news out on Brexit. PM Boris Johnson is quoted as saying that there’s a “strong possibility” of a no-deal Brexit. This comes after talks broke down between the two sides over the past few days. This impacts the Aston Martin share price negatively due to the implications of a no-deal result. Last year the business announced it had set aside £30m for a Brexit contingency fund, to draw on if needed. Although this is good planning, it shows the negative impact Aston Martin expects.
If the UK reverts to WTO rules, then UK car manufacturers would have to source at least 55% of its car parts locally. Aston Martin say it’s at this number, but looking to the longer-term this could mean higher costs of production. Cheaper labour and cheaper parts from abroad couldn’t be fully utilised, making the car more expensive than competitors in Europe.
Another impact of Brexit could be lower consumer demand, if the economy struggles as some are predicting. If the UK heads into a deeper recession, then luxury goods would typically perform worse than normal goods.
All these thoughts were being reflected in the Aston Martin share price on Friday.
Financial underperformance
Looking at the slightly longer term, the Aston Martin share price is down 60% in 2020. Financial underperformance is the main concern for investors. The main drag here is the net debt, which in a recent trading update stood at £869m. Comparing this to Q3 revenue of £124m, it really is a sizeable amount. I wrote a piece discussing it with regards to what I think Warren Buffett would do, which you can read here.
I do understand that the company’s financials struggles have a lot to do with the global pandemic. Yet this is not the first time Aston Martin has been in financial difficulties. The company has gone bust seven times in its history!
So when you add together the longer-term struggles to have a healthy business with short-term Brexit worries, the Aston Martin share price is always going to lose out. I’m staying away from investing in the business.
Instead, I recently invested in The Hut Group. It’s the opposite of Aston Martin, with a rising share price. Year-on-year the business is growing strongly. Unlike Aston Martin, the global pandemic has not hurt the company either. Aston Martin will be on my watch list, but isn’t high up on it.
