I totally understand why some people are attracted by the apparent value on offer when looking at the share price chart for carmaker Aston Martin (LSE: AML). Its shares sell for pennies and are 42% cheaper than a year ago.
Yet the company has a very powerful, unique brand that gives it high levels of pricing power. How hard can it be to make money?
I fear Aston Martin shares may end up going to zero. I do not think they are a bargain so much as a potential value trap and have no plans to invest. Let me explain why.
Making money’s harder than spending it
Let’s start with the question I posed above: how hard can it be to make money? The answer, in the case of Aston Martin, is “very”.
Take the first three months of this year, for example. The company made revenues of £234m. But it made an operating loss of £67m. In fact, during that quarter, its operating loss averaged around £71k for every car it sold (based on wholesale volumes).
How can that be? After all, Aston’s prestigious brand means it can sell its cars for six figure sums. Clearly, the business model is not working well. Maybe ramping up volumes could help, but they only grew 1% year-on-year during the quarter.
The company had a variety of costs during the quarter that ate into profitability, such as software development. However, operating losses have been a consistent theme since Aston Martin listed on the stock market in 2018. I am not confident that the business model as it stands is viable.
Debt can kill a business
Not only that, but operating losses are only part of the picture. Aston Martin also has high financing costs to pay on top of its operating losses (or profit), thanks to a debt pile that was approaching £1.3bn at the end of the first quarter.
Shareholders have been repeatedly diluted as the company raised new money, but that net debt was still over a fifth higher than just one year before. I see a risk of further dilution. In fact, I see a risk that if the day comes when repaying or rescheduling the debt (or even the interest) becomes impossible, debtholders could take over the company and wipe shareholders out altogether.
That risk is too large for me even to consider touching Aston Martin shares with a bargepole.
I may be missing a bargain
Aston Martin’s brand and unique cars really are a great asset, in my view. While I am downbeat about the company’s prospects, if it manages to turn them around then buying Aston Martin shares today could turn out to be a real bargain.
The firm expects to generate free cash flow in the second half of this year. That is only part of what I think it needs to do to prove its viability, but if it does hit that target then I think it is a step in the right direction.
Still, I remain concerned that cheap-seeming Aston Martin shares could turn out to be a value trap. I will not be investing.
