Even for lovers of high-performance cars, this year has been quite a ride for shareholders in Aston Martin (LSE: AML). Since the start of January, the Aston Martin share price has soared 123%.
Still, the shares are slightly less than a tenth of what they were when the company listed in 2018.
Given their strong recent momentum and historic valuation, could the shares double again?
Improving outlook
Throughout its life as a listed company, Aston Martin has had the makings of a great business. It has an iconic brand, unique products, and a well-heeled customer base. That sounds like it ought to make for a profitable business model.
The company’s main problems have been twofold (and related). One is the challenge to convert sales into profits. The second has been a large debt pile taken on to help prop up the loss-making business.
In the first half, sales volumes rose 10% compared to the prior year period, while revenues improved by a quarter. That gap shows the pricing power the luxury marque has, that allows it to raise prices while still growing sales volumes.
Meanwhile, net debt fell 33%. This week the company raised more funds through yet another rights issue. That could help it improve its balance sheet.
Shareholder dilution
A series of rights issues has diluted shareholders massively since Aston Martin listed and I see a risk that that could happen again in future.
Some very sophisticated investors have pumped large amounts of money into Aston Martin shares lately. But they include strategic investors like Mercedes, whose motivations for investing may be different to my own as a small private investor.
Potential bargain?
Still, the current Aston Martin share price gives the business a market capitalisation of £2.7bn. The company expects adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) to be around £2.7bn in 2024/25 and improve after that.
That suggests that, using adjusted EBITDA, the company is trading on a prospective price-to-earnings ratio of under six.
That may sound cheap. Indeed, if the company hits those targets and then continues to improve financial and operational performance, I think that could justify the Aston Martin share price doubling in coming years.
Why I’m not buying
But this feels speculative to me. The company has not yet hit those targets. I also do not like adjusted EBITDA as a metric.
Interest alone is a real and large expense for the company, which despite a year-on-year improvement still ended the first half with £846m in net debt. The company paid £61m of interest in the first half. Reducing and reorganising its debt should cut interest costs, but I expect the company to remain indebted for the foreseeable future.
The business performance is improving but Aston Martin remains loss-making and has destroyed massive amounts of shareholder value in under five years as a listed company. I would not consider buying the shares until the company has proven it can be consistently profitable.
