With its iconic marque, improved sales and management focus, Aston Martin (LSE: AML) might look like a business set for success. The Aston Martin share price has indeed been in the fast lane – but going the wrong way. Over the past 12 months, the shares have lost 59% of their value.
Could this be a buying opportunity for my portfolio? Or is the company a value trap I ought to avoid?
Possible bargain
There definitely is a bull case to be made for Aston Martin shares. The brand is iconic. Increased marketing efforts over the past couple of years have helped improve its appeal further, which could be good both for demand and profit margins. The new V12 Vintage was already sold out by its March launch date.
Aston Martin’s move into sports utility vehicles seems to have been a success. That could help it serve a larger customer market than it has done historically. Although the company’s wholesale volumes fell 14% in the first quarter, it said that retail customer demand continues to run ahead of wholesale volumes. A new chief executive is joining and formerly had that role at Ferrari, so he ought to know the luxury car industry well.
Last year, adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) were £138m. That is less than a sixth of the current market capitalisation of £933m. That could make the company valuation look cheap to some people.
Potential value trap
But a problem for the Aston Martin investment case is that some of those accounting exclusions are real cash expenses that can turn a profit into a loss.
The first quarter illustrates this point perfectly. Despite wholesale volumes shrinking, revenue actually grew 4% year on year. That suggests Aston Martin’s focus on increasing the role of higher priced models in its product mix is working. Adjusted EBITDA grew 18% to £24m for the quarter. Then there were financing costs. Those grew to £64m. In the past couple of years, Aston Martin borrowed heavily. Substantial interest rates are a large risk to profitability in coming years even if the company makes a profit at the operating level. So adjusted EBITDA of £24m actually ended up as a pre-tax loss of £112m.
Net debt grew in the quarter and now stands at £957m. Even though the company incurred a lot of financing costs, it also added more debt to its balance sheet rather than reducing it.
That is why the Aston Martin share price looks like a classic value trap to me. The operating business itself may be doing well, but the company is saddled with a balance sheet that could continue to eat deep into profitability.
My move on the Aston Martin share price
I do not think a new chief executive can easily fix this. The most recent one has been working hard at it but still lasted only a couple of years.
Aston Martin has a history of diluting shareholders heavily and there is a risk it could do so again to improve liquidity. Its debt burden relative to earnings potential makes its financial outlook unattractive to me. I will not be buying Aston Martin shares for my portfolio.
