Over the past year, shares in luxury carmaker Aston Martin (LSE: AML) have increased in value by 82%. But for most of 2021, the Aston Martin share price has put in a lacklustre performance, falling by 15% since the start of February.
Below I explain why – and whether I think the shares can rev up for future price acceleration.
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Loaded with expectations
The car company has had a very bumpy road for several years. A change in management, liquidity worries, and the expense of launching its first SUV combined with falling sales. So it’s little surprise that the shares tumbled over several years. Last year, new management and new liquidity provided a much-needed boost to investor confidence. The Aston Martin share price responded positively.
I think that helps explain the recovery in the latter part of 2020 and start of 2021. Once that had been reflected in the share price, however, attention turned to the underlying business prospects for Aston Martin. For the shares to move further upwards, I think the City wants to see clear evidence that the company is on track to achieve its ambitious growth targets.
Aston Martin business performance
One of the difficulties here is that the company’s management has set itself very ambitious growth targets both for revenue growth and profitability. That leaves it little room for error in execution. At the interim results stage in July, the company announced first-half performance that was in line with expectations. Wholesale deliveries more than doubled and the new SUV model represented over half of those, suggesting the punt on the SUV programme is paying off.
But those comparative figures were based on very weak performance in the first half of last year. As well as that, the company still turned in an operating loss of £38m – more than £1m a week. While that’s much better than the £160m operating loss recorded in the prior year period, it’s still a large loss.
With its sizeable borrowings at high interest rates, the company needs to pay heavily to service debt. So while operations delivered free cash flow of £44m, overall the company’s free cash outflow in the first half saw £104m go out the door.
Aston Martin: bullish and bearish points
I see a credible bull case for Aston Martin. Deliveries are up, the SUV programme seems to be progressing well and the company is focussed on cost control. This could all lead to improved business performance overall.
But risks remain. The balance sheet remains loaded with debt, which will eat into profits. The SUV programme has gone well so far, but initial sales could be the peak if customer demand isn’t sustained at launch levels. Supply chain challenges in the automotive industry could throw a spanner in the works when it comes to production levels, as we’ve seen at other carmarkers.
I think the Aston Martin share price could go up
Those risks are helping keep the Aston Martin share price in check for now, I reckon. But if the company shows continued progress, for example in its full-year results, I do see potential upside for the Aston Martin share price.
But this is a cash-hungry business. Rights issues have diluted shareholders heavily and there is a risk that could happen again. That alone puts me off adding Aston Martin to my portfolio.