Aston Martin (LSE: AML) shares have experienced a catastrophic decline in recent years. Currently, they’re trading for 63p – about 98% below where they were trading back at the start of 2019.
What’s interesting is that over this period, shares in rival Ferrari have roughly quadrupled, which shows that companies in this industry can be good long-term investments. This begs the question – could Aston Martin generate strong, Ferrari-like returns from here?
Aston Martin vs Ferrari
At first glance, Ferrari and Aston Martin appear to be similar companies. Both make expensive luxury sports cars for the global elite.
However, when we zoom in on their financials, it becomes clear that they’re very different businesses.
Looking at Ferrari, it’s a highly profitable company. Over the last five years, its return on capital employed (ROCE) has averaged 22%. This shows that the company is really good at using its capital to generate profits (companies with consistently high ROCE are often good long-term investments).
Additionally, the company has been able to deliver strong growth in both revenues and earnings over this period. Revenue has jumped from €3.8bn to €6.7bn while net profit has surged from €696m to €1,522m. So, clearly this is a high-quality company with an excellent business model and strong control over production and pricing.
Turning to Aston Martin, it’s a very different story. To be fair, it has generated decent revenue growth in recent years. Over the last five years, its revenue has climbed from £981m to £1.6bn.
However, profitability has been non-existent. Over the five-year period, the company has been consistently loss-making. So, it hasn’t been able to translate its brand prestige into earnings, which suggests that its business model has some problems.
Can Aston Martin turn things around?
Now, if it was just a few minor challenges that Aston Martin was facing, the company could be capable of turning things around in the near term and generating attractive returns for investors. However, there’s a lot going wrong here at the moment.
Some issues include:
- Slowing sales in China (a key market for luxury brands)
- Rising costs (a number of factors have driven up costs sharply)
- US tariffs
- Supply chain disruptions
- A large amount of debt on the balance sheet
For me, the rising costs are problematic. Recently, the company said that capital expenditures will be £1.7bn over the next five years as it pivots to an electrification strategy (which means that profitability is very unlikely).
Debt is also a major issue. At the end of September, net debt stood at £1.4bn, meaning interest payments are going to be a burden.
My view
Given these issues, I don’t think Aston Martin shares are likely to generate strong returns for investors in the years ahead. To my mind, there’s just too much going wrong for the company.
Of course, anything can happen in the stock market. And there are plenty of factors that could lead to a share price pop at some stage including a takeover offer, a short squeeze (where those who are betting against the stock are forced to buy it back to close their positions), and stronger demand in China.
Overall though, I find it hard to get excited about this stock. In my view, there are much better stocks to consider buying today.
