Down 14% in a month, this well-known FTSE 250 stock could keep falling fast

Jon Smith explains why recent results show an ongoing transformation for this FTSE 250 stock, but one he feels won’t end up working.

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Earlier in May, Aston Martin Lagonda (LSE:AML) released the latest quarterly earnings. The fact that the FTSE 250 stock has hit fresh 52-week lows since then shows how investors feel about what the company’s doing right now. The 14% fall in the past month compounds the 35% decline over the past year. Here’s why I’m staying away.

Looking at the latest numbers

The report referred to Aston Martin going through a “transformation” this year. Whenever I hear this word, it’s usually a cover up for underperformance. During periods of transformation, the financial results usually aren’t pretty.

This was the case for Q1. Revenue for the quarter was down by 10% versus the same period last year. At the bottom line, the business posted a loss before tax of £138.8m, significantly larger than the £74.2m from Q1 2023.

There was some positive news regarding new car models. Four new ones are being released this year, with the buzz around these potentially going to help boost revenue for the second half of the year. With new models being jacked up in price, the average selling price (ASP) should continue to rise. For Q1, the ASP was £253k, up from £213k last year.

Understanding the vision

It’s clear to me what strategy Aston Martin is pivoting towards. It’s aiming to increase the price of the cars significantly, something that’s been developing over the past couple of years. The higher the selling price, the larger the profit margin.

So even if revenue (and demand) remains stagnant, the business can become profitable because it’ll make a larger profit margin on the revenue.

This is a bold approach though. Fundamentally, are the cars worth the extra money being charged? For example, look at that ASP increase mentioned above. Yet if the extra value isn’t there, demand will fall fast. Aston Martin might make a higher profit margin, but if it can’t shift many cars, this will be pointless.

The fact that revenue fell in Q1 is an early warning sign to me that customers aren’t that keen on paying higher prices. If this is backed up by a weak Q2, I don’t see any reason why the share price can’t continue to fall.

Giving the firm some time

Some would argue that I need to give the business some breathing room. During transformation periods, it’s easy to pick fault. With my long-term hat on, it could be that Aston Martin successfully positions itself as an ultra-high-end car manufacturer that charges £300k+ for the most basic model.

If this happens, then it’s definitely plausible that the share price could rally back. This is especially true given how much pessimism is already built in to investors’ expectations.

Yet based on the facts I have right now, I struggle to see this happening. On that basis, I’m going to be watching on from the sidelines for the foreseeable future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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