Aston Martin is an iconic brand for many. It has featured in James Bond films and when the company behind the brand listed last year in October it certainly brought more glamour to the stock market. However, since then it hasn’t provided a comfortable ride for investors. The share price has seemed to be skidding off the edge of a pretty steep hill, but like James Bond it will probably survive. Could the newly listed company still have something to offer investors like me now the share price has fallen?
At the time of the initial public offering (IPO) it was expected that Aston Martin Lagonda Global Holdings (LSE: AML), to give the listed company its full name, would be bolstered by its plans to boost production from around 6,300 cars this year to over 14,000 in the coming years.
The problem was that a company with a history of losses and bankruptcy trying to list on the stock exchange at a high valuation and loaded up with debt wasn’t an attractive proposition to many. The tribulations of Debenhams, the AA and Saga show that indebted companies that float on the public market can really struggle and Aston Martin’s net debt when it listed was £538.8m. This valued the company at 23.6 times EBITDA on its debut.
Investors want dividends and rewards like a growing share price, not debt that eats up profits and reduces cash flow, both of which are vital to ongoing success and boosting the share price. These issues have resulted in the share price falling by around 48% since listing. Ouch.
Will it race further down?
Even now, shares in Aston Martin seem too expensive. Preliminary results for the 12 months to 31 December showed operating profit fell an eye-watering 51%, despite the number of cars sold rising by 26% and revenue moving up a gear. Cash fell hugely from the previous year, primarily as the result of supply chain issues – something Brexit is hardly likely to make easier (despite the delay until Halloween).
Even worse for me is that Aston Martin just doesn’t offer a strong return on investment or margin. In its results, return on invested capital (ROIC), measuring the efficient use of capital, was 12.8%, which is hardly compelling. Companies that can invest capital to create growth will do better in the long term and furthermore, Aston Martin’s margin is lower than Ferrari’s – 17% versus 24%.
And it gets worse
This month, analysts at Deutsche Bank have turned bearish on the company, expecting that customer demand for the FTSE 250 group’s cars will be hit by wider market volatility and Brexit-related uncertainty this year. As a result, they halved their target for the share price down to 1,000p (the share price is around 940p at the time of writing meaning there is limited expected growth) and they cut their recommendation from buy to hold.
Overall if I want to use shares to grow my wealth – and perhaps even buy an Aston Martin – I wouldn’t buy Aston Martin shares to do it. I think there are many shares in the FTSE 250 that offer far better prospects for growth. At the moment Aston Martin is back of the grid (yes I realise they’re not an F1 team, but you know what I mean).
Andrew Ross has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.