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Why I’d steer clear of the Aston Martin share price right now

Since listing on the London Stock Exchange in October of last year, Aston Martin Lagonda (LSE: AML) shares are currently down by 40%, although they have risen 20% from May’s low. Shares in the only UK-listed car manufacturer have been affected by both the general malaise that is sweeping the global automotive sector, and the high level of investments associated with the current portfolio expansion.

Sales volumes rose by 10% in the first quarter of the year, but a lower average selling price meant that revenues increased by just 6%. There was strong growth of more than 20% in Asia and the Americas, counterbalanced to an extent by lower volumes in Europe and the UK. An operating loss of £3 million for the period reflected a changing product mix, along with a ramp-up in costs associated with investing in new vehicles and the development of a new manufacturing centre in Wales.

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The increase in costs is partly a result of the development and production of the DBX, Aston Martin’s highly anticipated first foray into the luxury SUV sector. The luxury car manufacturer hopes that the DBX will appeal to the growing number of high-net-worth individuals across the world. Aston Martin estimates that up to 70% of its customers own an SUV, and along with other luxury manufacturers such as Lamborghini and Bentley, it is focusing on capturing a slice of this increasingly valuable market. Along with a move into the luxury SUV market, AML is also investing in electrifying its product range, by launching a new all-electric brand, Lagonda.

In the short term, the high level of investment in new vehicles, a new manufacturing facility and electric powertrains will continue to depress margins and burn cash. Costs associated with last year’s IPO pushed the luxury brand to a pre-tax loss of £68 million in 2018, with an operating profit margin of less than 7%. The first quarter saw a cash outflow of £16 million, whilst net leverage crept up to 2.6 times EBITDA (earnings before interest, tax, depreciation and amortisation).

Yet management are still expecting an increase in sales volumes of 10% for the year, with an operating profit margin of 13%. In the medium term, AML aims to double car sales to around 14,000 per year, and is targeting an operating profit margin of more than 20%. But the shares are already priced optimistically, I believe. Even when ignoring the costs of last year’s listing, the shares trade at over 30 times last year’s adjusted profit level.

The share price reflects Aston Martin Lagonda’s status as a luxury brand, and takes account of its pricing power and resistance to global economic trends. Along with the strategic investments that are being made, this means that the shares have potential in the long term. However, in the short term investors have to contend with a weak global car market, low profitability, negative cash flow, increasing net leverage, and increasing risks of a no-deal Brexit. On balance, I think the shares are best left avoided for now.

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Thomas Carr 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.