Aston Martin Lagonda (LSE:AML) shares are down 41% over the past year. In fact, the stock’s been trending lower for some time, having dropped 76% over the last five years. Logically, if it isn’t going bust, there’s the potential for it to become a value stock. The tricky question is trying to figure out at what point it’s worth buying.
Issues with the company
It might sound obvious, but I don’t see the business as worthy of buying until it’s solved the current problems it faces. So a good starting point is to analyse some of the main issues that have caused the stock to fall so much.
There’s a mix of long- and short-term factors at play. Over the past two years, the share price has been under pressure as the company’s repeatedly burned through cash and leaned on equity and debt raises to stay afloat. Since its 2018 IPO, it’s raised over £3bn in funding yet still sits on a debt pile of over £1bn. At the same time, it hasn’t managed to generate profits, meaning that overall finances haven’t impressed investors at all.
In the short term, the stock hit a record low in March when President Trump announced a 25% tariff on imported cars. This came after the business already announced plans in Q1 to cut some of the workforce, with the eventual Q1 results released last month showing a £79m pre-tax loss.
Thinking about the coming year
Some factors should ease over the coming year. For example, I expect the tariffs to be walked back, meaning that exports to the US shouldn’t be negatively impacted. The workforce cut and general streamlining of costs should be a medium-term positive. Even if revenue stays flat, lowering costs should allow the business to get closer to breaking even.
If I assume that these issues do all get rectified, there’s an argument that buying the stock around current levels (80p) could represent a good-value purchase. It has sizeable access to cash funding, so the risk of it going bankrupt’s relatively low.
However, it’s the longer-term problems that make me cautious. The company has been posting losses for years now. Even though various things have changed over that period, no car launch or strategy shift has been enough to make it profitable.
The bottom line
There are other luxury car manufacturers, like Ferrari and Porsche, that trade on the stock market. These are profitable. Even though it could be argued they aren’t value plays like Aston Martin mey be, they actually look more suitable for consideration to me.
Simply put, until Aston Martin can show me that there’s the potential to break even, I can’t justify investing. There’s simply too much risk, Others might spot something I’ve missed, or have a higher risk tolerance, meaning they might consider buying now. It’s a subjective call!
