Luxury carmaker Aston Martin (LSE: AML) is good at making cars that move at high speed. The Aston Martin share price has also been moving at high speed lately, but in reverse gear. Over the past year it has crashed by 78%.
Despite that, I still fear the shares may be a value trap and will not be buying them for my portfolio.
A good business but a bad investment
One costly mistake many new investors make is confusing the potential of a business with its appeal as an investment. I think Aston Martin illustrates this handily.
The business itself has a lot to like. Its iconic brand is loved by motor enthusiasts across the globe, allowing the company to charge premium prices. Volumes are fairly small, meaning there is space to grow in future. Recent years have seen the company branch out into sports utility vehicles, widening its potential customer base.
But if the business has these attractive attributes, why do I think it could be a value trap if I invest in it? That is because of the way it is structured financially. The company’s balance sheet is bloated with debt. At the half-year stage, net debt had risen to £1.3bn. Even if the company does well, the need to service that debt could keep the Aston Martin share price depressed.
Balance sheet woes
The carmaker has a plan to deal with its problematic balance sheet, however.
Aston Martin announced today that it has raised around £576m in a rights issue. That could help reduce the debt and improve the firm’s liquidity cushion. I have my doubts about how transformative it may be, however. The company plans to use no more than half of the new funds to reduce debt. So I expect net debt to remain high for the foreseeable future.
But the downside is that the rights issue will dilute existing shareholders heavily, not for the first time in the past several years. I have long seen further dilution as a risk to owning Aston Martin shares and it has come to pass.
Share price collapse
After falling 9% on today’s news at the time of writing, the Aston Martin share price now stands 96% below the level at which it was listed on the stock market just four years ago. Some of that fall reflects the enormous share dilution seen in that period.
Despite that fall, I continue to avoid adding the shares to my portfolio. The rights issue will help strengthen Aston Martin’s finances and investors like Mercedes-Benz are buying in. But they may have strategic objectives, not purely financial ones like I have.
What I see is a business with a lot of debt, a history of massively diluting shareholders and risks such as a recession hurting sales. Management has been chopped and changed several times in recent years and I lack confidence in the investment case from a small private investor’s perspective. Even at this stage, I see it as a potential value trap. The Aston Martin share price collapse does not tempt me to buy for my portfolio.
