On 10 September, car manufacturer Aston Martin confirmed its intention to float on the London stock market as Aston Martin Lagonda Global Holdings plc, and the news is generating a lot of interest. But should you participate in October’s planned Initial Public Offering (IPO) by applying for some shares?
I think it’s safe to describe the British firm as owning an iconic brand in Aston Martin. James Bond drove one in some 12 movies including Skyfall and Spectre. But just because we’ve heard of a company and its brand, doesn’t mean we should pile in to the shares without careful consideration.
Are IPOs worth the risk?
Generally, I reckon IPOs are a bit of a gamble for investors. Speculation can make newly-issued stocks behave in unpredictable ways. Sometimes they shoot up straight away leaving the underlying business overvalued as a wave of investor enthusiasm swamps the shares. If that happens, the share price is likely to fall again. Sometimes shares plunge as soon as they go live on the stock market leaving IPO investors out of pocket. Then again, the shares could list and then remain at the initial price for an extended period.
We don’t know how the stock market will judge the valuation or the prospects of the firm until the shares begin trading. So, maybe it’s a better idea to let the IPO happen and allow the shares to find their own level over a period of weeks or months before buying some.
My biggest concern is that Aston Martin’s IPO could set the valuation of the company too high. Car manufacturing is a difficult, capital-intensive business. It’s also a highly cyclical pursuit, even if you are selling the finished product to rich people at around £150,000 for each luxury sports vehicle, as Aston Martin is. The long list of defunct British car marques attests to the difficulties carmakers face. Aston Martin itself has been bust seven times in its history, which doesn’t bode well for a buy-and-hold approach to investing in the company or the sector.
Ambitious plans for growth
Naturally, the financial figures have been buoyant lately, otherwise, the company wouldn’t be floating in the first place. But Aston Martin carries a pile of debt even though its fortunes have turned around from a loss-making situation. Meanwhile, the newly appointed directors seem to believe the turnaround is complete, which I see as a bit of a shame for investors who are considering IPO shares. Gains from a turnaround turning can potentially outpace mere forward growth, and ongoing growth is what the firm is pitching.
If you take up shares in the Aston Martin IPO you will be investing in a different beast from the one that has got this far. The company plans to widen its product range under its Second Century Plan to include sports cars, SUVs and performance sedans, as well as pushing the marque into luxury areas beyond motoring. Will the firm’s previous success as a focused luxury sports car producer extend easily to a wider market? We’ll have to wait and see. Meanwhile, when the proposed Price Range Prospectus is released around 20 September, I recommend that you scrutinise it carefully to make sure the shares represent decent value before you agree to the final price of the shares to be declared in October.