The most attractively speedy thing about Aston Martin (LSE: AML) for most of the past few years has been its cars. The Aston Martin share price has been heading downhill fast for much of the time, falling 59% in the past year alone.
But on a shorter time frame, things have been looking better. In fact the carmaker’s shares have more than doubled since early November. I did not expect such a speedy rise. So, was I wrong not to buy into the company before – and might it make sense for me to invest now?
Why I’ve been bearish
I have been consistently downbeat about the outlook for Aston Martin. That has primarily been because of its business model.
Weighed down by debt, it faces hefty interest costs now as well as needing to repay its loans at some future date. That risks eating heavily into profitability. It also increases the risk that the firm will try to boost funds by diluting shareholders, something it did last year.
On top of that, the basic economics of the business are not currently attractive to me even when setting aside the thumping debt pile. In the first half of last year, for example, the operating loss was £90m. Interest costs are on top of that.
Reasons to be bullish
But have I been too pessimistic in my analysis of the company’s prospects? After all, the surging Aston Martin share price suggests that some investors consider it to was badly undervalued a few months ago.
The business definitely does have some things going for it that could help future commercial performance. The brand is iconic and has a loyal, well-heeled fan base. The business has been changing its product mix and pricing, which could improve profitability. In its most recent quarter, for example, revenues grew 33% year on year even though wholesale volumes only moved up by 3%.
The company has attracted money from investors who are experts in the car arena, including Mercedes-Benz. While that could be a strategic rather than purely financially motivated investment, I still see it as a vote of confidence in the outlook for Aston Martin.
Margin of safety
One of the concepts Warren Buffett uses when investing is always having a margin of safety when assessing a company’s prospects.
I could have doubled my money investing in Aston Martin over the past few months. But I was not convinced by the company’s commercial prospects back in November – and to be frank, nothing has happened since then to change my mind.
With improving momentum and investor enthusiasm, it could be that the Aston Martin share price continues to gain ground rapidly.
But I am not confident in the likelihood of that. In fact, I think the shares could well fall back. Aston Martin has been massively destructive of shareholder value in the past few years even including the recent price jump.
The share price has fallen 96% since the firm’s 2018 listing on the stock market. Past performance is not a guide to what will happen in future, but the company continues to bleed cash and make heavy losses. I see no margin of safety for me in such a situation. I will not be investing.
