The stock market can be a strange old place. Take luxury carmaker Aston Martin (LSE: AML) for example. Its shares have lost 96% of their value in under five years. In the first week of November, when the shares were trading for pennies apiece, the company revealed that losses were sharply higher than at the same point in its previous financial year. Yet since then, the shares have rallied 90% in less than three months.
With a long way still left to go before the Aston Martin share price gets anywhere close to its former levels, could now be the moment to add it to my portfolio in the hope of turbocharging my investment results?
Basic issues remain
My answer is a resounding no! I have long felt that Aston Martin has the makings of an excellent business, thanks to its well-heeled customer base and iconic brand. But the investment case has been hurt by the company’s balance sheet.
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Net debt has actually grown at the company. At the end of September, it was £833m, 3% higher than at the same point the prior year. Aston Martin raised money by issuing new shares. That diluted existing shareholders.
I continue to see that risk if I invest now in the business, although its chairman said that he sees the latest fundraise as “the last foundation we need to realise our vision and start to unlock long-term shareholder value creation”.
Tough targets
I remain sceptical the company can realise that self-imposed version.
It is aiming for around annual wholesale volumes of around 10,000 by 2024-25. But in the first nine months of last year, those volumes were 4,060. On an annualised basis, that is far short of the target. The sales trend was negative, with a 3% decline compared to the same period the prior year.
There is good news too though. That may explain the share price surge over the past few months. Although wholesale volumes fell 4%, in the same period revenues rose 16%. That suggests pricing action and product mix are helping to improve sales revenues, even on shrinking volumes. That could be good for profitability in the longer term.
Long-term outlook
I personally think the targets are important for management credibility, which I already see as low. Beyond that though, I am not sure they are important for me to consider as a potential shareholder. If Aston Martin can grow its revenues and start making profits, it might still be attractive to me from an investment perspective.
The revenue trend is positive. However, profits seem far off. Partly that reflects the cost of servicing the company’s debt. But even at the operating level, which excludes financial costs such as interest payments, the picture remains alarming. In the three months to September, operating losses came in at a beefy £59m, a 94% jump from the prior year quarter.
I’m not buying
Clearly, some investors are now focussed on the potential upside of an improving revenue performance at the luxury carmaker. So I think the Aston Martin share price could keep growing, though doubt it can recover to its former highs without dramatic business transformation.
With its large debt and ongoing losses, the company is too risky for my tastes. I will not be investing.
