There is glamour in the sleek, high-speed potential of Aston Martin (LSE: AML) sports cars. The Aston Martin share price looks less glamorous to me, however. It has also been moving at high speed – but in reverse gear. The shares have lost two-thirds of their value over the past year.
Could this be a recovery play to tuck into my portfolio in the hope of future share price growth?
A good business versus a good investment
I do not think Aston Martin is an attractive purchase for my portfolio despite its greatly reduced share price. The reason neatly illustrates the difference between a strong business and an attractive investment, in my view.
Aston Martin has enviable assets. Its iconic name and long heritage help create customer demand. Its involvement in motor racing recently has helped boost the glamour of this luxury brand further. Its customer base is well-heeled and the uniqueness of Aston Martin cars gives the marque a strong competitive advantage.
All of those elements add up to the makings of a strong business. But the company has taken on a lot of debt, reflecting the financial challenges it has faced in recent years. Such debt will need to be repaid in future. Meanwhile, Aston Martin is paying high interest rates on it. The company expects a cash cost of £130m for interest this year alone, leading to a £195m hit on its profit and loss account. That means, even if Aston Martin has the makings of a great business, it is not necessarily an attractive investment for my portfolio.
Tumbling share price
That is because even if the company makes an operating profit, it is likely to be eaten up by interest payments at least for the foreseeable future. Despite large interest costs, net debt actually moved up in the first quarter from £892m to £957m.
To pay off the debt faster, Aston Martin will need to boost profit margins, grow sales, or do both. It is actually on course to do both – higher margin vehicles have become more important for the company and it is also reckons it will boost wholesale volumes to around 10,000 annually by 2024 or 2025, which would be a 62% increase from last year. Last year Aston Martin grew its wholesale volumes by 82%, so although its sales target is ambitious I do think it could be achievable.
My move on the Aston Martin share price
However, the road thus far has been bumpy. Shareholders have been massively diluted in recent years. The shares have lost a whopping 94% of their value since the 2018 flotation. Management changes suggest the company’s aggressive growth plans could be challenging to achieve. The debt burden continues to hang over the company. Business recovery, therefore, might not equate to share price recovery.
For those reasons, even after the drop in the Aston Martin share price, I will not be adding the company to my portfolio.
