The explosion of the Rolls-Royce share price over the last five years is a remarkable comeback story that few investors predicted.
The once-struggling engineering giant went from the verge of bankruptcy to a free cash flow generating machine with chunky profit margins and accelerating growth under new leadership. And as a result, anyone who bought £5,000 worth of shares back in October 2020 is now sitting on an impressive £154,500!
This goes to show the enormous returns possible from investing early in a recovery story. And when looking at Aston Martin Lagonda (LSE:AML), the British luxury car manufacturer seems to also be in a sticky situation right now. In fact, since its IPO in 2018, the car stock is down 98%. And even in the last 12 months, shares have slipped another 30%.
But could this be the beginning of another extraordinary turnaround story within the FTSE?
Catalysts for recovery
For Aston Martin to stage a Rolls-Royce-like share price recovery, quite a few things need to happen. Arguably, the most important is a rebound in its free cash flow generation and the restoration of operation profitability. This is paramount since the group’s interest payments on its debts & equivalents currently consume more than what the business is actually generating.
Excess cash flow opens the door to critical debt reduction as well as the ability to reinvest in the business and get things back on track. Encouragingly, this might be on the horizon.
Management’s efforts to improve efficiency and refinance loans have put the business on track to re-enter positive free cash flow territory by the end of 2025, with earnings before interest and taxes (EBIT) expected to break even. Despite this, investor sentiment remains fairly weak given the firm’s track record of disappointment. But this bearish bias also increases the potential recovery returns that could be earned if management’s strategy succeeds.
Personalisation of existing vehicles is helping boost revenue through higher average selling prices. And with the upcoming deliveries of its refreshed core lineup alongside the launch of its new hybrid Valhalla model in the fourth quarter, it could trigger a nice growth catalyst entering into 2026.
What to watch
Analysts have identified some key metrics to watch closely that could signal progress towards recovery. This includes delivery figures for the second half of the year, and watching whether the recent gains in average selling prices can be sustained. Combined, these factors would pave the way towards wider gross profit margins – a good step towards better free cash flow generation.
However, there are some key concerns. Even if management executes perfectly, the weaker economic environment both at home and abroad does create an unfavourable headwind. Supply chain shocks due to tariffs could offset gains made in operational efficiency. And with demand for luxury items generally softening, a revamped lineup could fail to meet sales expectations.
Put simply, a lot of things have to go right for Aston Martin to deliver a similar explosive recovery to the Rolls-Royce share price. But a string of on-time deliveries, restoration of positive free cash flow, and continued efforts to deleverage the balance sheet might be enough to get the ball rolling.
That’s why I’m keeping close tabs on this FTSE enterprise. But for now, I’m investing in other, less risky opportunities.
