Share prices move around and so it is with carmaker Aston Martin (LSE: AML). But the movement of the Aston Martin share price has been dramatic. It has soared by over 150% since November.
Today, the company announced that last year’s pre-tax loss almost doubled to a shade under half a billion pounds. Yet the shares responded by moving up 15% in early trading.
What on earth is the reason for this lossmaking business to see such a share price increase lately – and have I made a mistake by not buying so far?
Sales growth
The results were not all bad, in fairness. Wholesale volumes last year moved up 4%. That is not massive sales growth, given the company’s ambitious plans, but it is growth nonetheless.
Revenues surged 26%. That is partly down to the mix of products but also points to the pricing power the luxury brand enjoys. It can push up prices for its deep-pocketed customers and still grow sales volumes.
Cash burn
But the results were weak in many ways. The operating loss rose 85% to £142m. On top of that the business faced substantial additional costs, such as interest. So its pre-tax loss was £495m. Net debt was reduced 14%, but remains at what I see as the high level of £766m.
The company significantly diluted existing shareholders to raise new funds. Even after that £654m fundraising, it ended the year with net cash and cash equivalents of £583m.
Aston Martin expects to move into positive cash flow generation in the second half of this year. If it does not and continues to burn cash on a large scale, I see a risk of further shareholder dilution.
Surging share price
Given that much red ink, why have the shares been on fire lately?
The volume uplift is positive news. The company said it remains on track to meet its target of around 10,000 wholesale volumes, although quietly dropped the 2024/25 date previously associated with that. It still has that date in place for its financial targets of around £2bn of revenue and £500m of adjusted earnings before interest, tax, depreciation and amortisation.
I see the earnings target as more important than boosting volumes. If Aston Martin can hit its financial targets and reduce its debt pile, then today’s market capitalisation of £1.6bn looks reasonable to me. After all, the company benefits from an iconic brand and well-heeled customer base. There is a limited number of supercar makers and each is distinctive, which builds customer loyalty, something Aston Martin has to a certain extent.
I think the surging Aston Martin share price reflects growing investor optimism about Aston Martin’s financial turnaround.
I’m not buying
However, I do not share that optimism. The company has destroyed massive shareholder value already. The Aston Martin share price has tumbled 94% since listing under five years ago and has repeatedly diluted shareholders.
Debt remains high and it continues to bleed cash. Even if it can breakeven at an operating level, it will still face high interest costs. The business expects to pay £120m in cash interest costs this year alone.
The recovery continues to carry considerable risks, in my view. Volume growth is modest and supercar demand may fall if the economy worsens. I am not buying the shares.
