With an iconic brand and well-heeled customer base, Aston Martin (LSE: AML) might seem like it has a license to print money. If only! The company has been losing money hand over fist – and the Aston Martin share price is now 88% lower than it was five years ago.
So, is the share price a bargain (or even a potential bargain) for an investor to consider?
I’m giving this a wide berth
In my opinion, it is not a bargain and I myself have no plans to invest.
I could be wrong and it may yet turn out that the current price is a bargain when seen from a few years down the road. So, let me explain my reasoning.
A lot of people confuse a good business with a good investment. Right now though, I think Aston Martin does not even require that level of analysis. I do not even see it as a good business, let alone a good investment.
Consistent losses at the operational level
Understanding why can be useful when it comes to making stock market decisions.
Looking at company accounts may sound boring but it is essential if an investor wants to understand how a business is performing.
With thousands of car sales a year and high pricing power, Aston Martin may seem like it has the makings of a lucrative business. In fact, last year it made an operating loss of £100m. That was 11% better than the prior year — but is still substantial.
Wholesale sales volumes were just over 6,000 vehicles. So the operating loss equates to around £16K per vehicle. To me, that does not sound like a good business to be in.
Non-operating losses make things worse
But the bad news does not stop there.
On top of an operating loss (or profit), a company’s financial performance is influenced by non-operating costs (or gains) from investing and financing.
In the case of Aston Martin, those are substantial.
After all, it has £1.1bn of net debt, much of it at high interest rates, meaning there is a large interest cost. Indeed, its net financing expense last year jumped to £190m. It spent over £2m a week on average in net interest costs but the debt remains stubbornly high.
So, not only is the business losing money at the operating level, but it is doing even worse when taking other costs into account. On that basis, I do not think it is a good business let alone investment.
Looking for bargains, but also considering risks
What if things turn around though? Might the Aston Martin share price be a potential bargain if future performance improves?
In theory it could and I do think the business has strong assets especially its unique brand and pricing power.
Management has consistently struggled to get the economics right so far, however, and I see that large net debt as a big risk. Not only does it need to be serviced but ultimately it will need to be paid off. One way to do that could be by issuing new shares and diluting existing shareholders.
