Since just last week, the Aston Martin Lagonda Global Holdings (LSE: AML) share price has plunged by almost 19%.
Even in a weak market, that looks like a big move. So is the dip a buying opportunity for investors?
Let’s start by putting the decline in perspective. With the share price near 242p, the luxury sports car maker is around 26% lower than it was a year ago.
But investors liked this month’s full-year results report. And the stock moved almost 50% higher on its release. So the stock has been volatile.
But it’s worth noting the company isn’t making profits at the moment. However, City analysts predict smaller losses for this year and next year. And the firm’s annual revenue has been growing.
There may be profits ahead
If those trends continue, the business may become profitable in years to come. There is, however, a fair chunk of debt on the balance sheet. And without earnings, interest on borrowings may become problematic.
Therefore, it’s not ideal that the business has cyclical characteristics. And any protracted general economic downturn ahead may cause the company a headache.
This month’s full-year report showed increasing losses year on year for 2022. But there was strong performance in the fourth quarter. And revenue was higher, with the directors reporting robust demand across the company’s portfolio of product lines.
Something like 80% of the current range of GT/sports cars have been sold out for 2023. And the business coped well through the supply-chain disruption that was a feature of the economic landscape last year.
Looking ahead, the company said it expects significant growth in profitability in 2023 compared to 2022. And that means reducing losses. City analysts have pencilled in a net loss of £152m.
But if that outcome happens, it will be a vast improvement on the almost £528m the business lost in 2022.
Ongoing brand strength is key
The directors said the improved situation will be driven by an increase in volumes and higher gross margin in core and special vehicles. Capital expenditure looks set to peak in 2023. And positive free cash flow should occur in the second half of the year.
Meanwhile, without earnings it’s hard to put a valuation on the business. However, the price-to-book value is not outrageous at the current level around 2.3.
But in the future, profits could arrive. And that may happen fast if things click for the enterprise.
The strength of the brand is key to future performance. And as long as customers continue to view the cars as special, I reckon the business may build on its recent gains.
Therefore, the recent stock weakness may be a buying opportunity. But with a loss-making operation like this, thorough research is essential before buying any shares.
Investors need to build up conviction about the potential of the business in order to hold on for the long term. But I reckon this month’s positive results report is reason enough to look deeper into the situation.
