Luxury carmaker Aston Martin Lagonda (LSE: AML) has released its third-quarter results. Sales are booming — but the company is still loss-making. With the Aston Martin share price little changed after the release, is this a buying opportunity?
Growing sales, narrowing losses
The results undoubtedly contained some cheering news. At £238m, the group’s quarterly revenues were 92% higher than those in the equivalent period last year. The company has now sold over 2,100 models of its sports utility vehicle, the DBX. Changes in the factory operations several months ago should allow for more production. The company is set to start deliveries of its Valkyrie sportscar in the current quarter.
But not all the news was good. The company recorded a £30m operating loss in the third quarter. That was less than half the level of last year’s third quarter, but it’s still sizeable. Meanwhile, the pre-tax loss actually increased to £98m for the quarter. When an operating loss falls but the pre-tax loss rises, that typically indicates financing or investment costs have driven the larger loss. In its third quarter, Aston Martin registered a £68m net financing expense.
Meanwhile, the balance sheet continues to be a key concern for the Aston Martin share price. Aston Martin is carrying £809m of net debt. It expects around £165m in interest costs for the full year.
Improving business momentum
Overall, I think the results are a strong indication that the current management has control of the ship and is steering it at speed in the right direction. The DBX programme was a big risk but demand so far suggests that it will pay off. Meanwhile, the company has focussed on improving its operational efficiency and that shows in the results. Its brand building is also helping to support higher pricing.
However, while the business is currently doing well, it had to take some drastic actions over the past couple of years to get here. Most notable among them was increasing liquidity. It did that through a highly dilutive rights issue and by adding substantial debt. Much of the debt was at a high interest rate. So the current business performance is tempered for me by the need to keep servicing the company’s debts. That could mean that even if Aston Martin converts its operating loss into an operating profit in coming quarters, the company will still report a loss overall.
My move on the Aston Martin share price
The third-quarter results and upbeat outlook have improved my confidence in the turnaround under way at Aston Martin. The Aston Martin share price moved up modestly in early trading, and is 66% higher than it was a year ago, at the time of writing this earlier today.
But I don’t see this as an opportunity to add the company to my holdings. The balance sheet is a key risk and servicing debt will likely deflate returns for years to come. The company is still loss-making. If demand recovery slows, that loss could widen again. The history of shareholder dilution also puts me off. If Aston Martin does face higher liquidity needs again in future, shareholders could again be diluted.
