When the news broke that Aston Martin (LSE: AML) was planning a stock market flotation in 2018, many seasoned investors sucked their teeth and shook their heads. The thing with luxury car brands is that, well, there’s a tendency among them to go bust. They’re big consumers of cash, and though their products can sell for eye-watering sums, their profitability can be surprisingly uncertain.
Buy at IPO?
An IPO can be the worst time to invest in a stock. The owners of a company don’t come to market to give private investors a bargain buying opportunity. No, they plan their timing to try to get the most cash from us that they can. Buying into a company at flotation is something I just don’t do, as one thing I definitely want see before I buy is a track record as a public company.
So my general aversion to new issues, coupled with the horrendous risks I see in buying a top car marque, meant I kept well clear and watched from a safe distance. I’m very glad I did.
Today, barely a year since Aston Martin made its entrance on the stage of the London Stock Exchange, its shares have lost 70% of their opening value. It’s not been down to one specific calamity either, as the price has been in a steady and inexorable fall almost from day one. So what’s been happening?
The answer is as simple as they come — Aston Martin is just not selling enough cars, and that’s meant it’s had to borrow a load more cash to keep going. We saw the biggest two-day fall in the Aston Martin share price on 24 and 25 September, when the company revealed that it had just borrowed $150m and had an option to borrow $100m more.
The big shock wasn’t so much the amount that had been raised, but the staggering 12% interest rate that Aston Martin had to swallow to get its hands on the cash. As my Motley Fool colleague Roland Head suggested at the time, the fact that the company was having to pay so much to borrow money now, when it had been able to borrow at 6% in the year before flotation, suggests that lenders are getting cold feet over its long-term viability.
The amount of debt on the books is growing alarmingly, as the company’s first year on the market has gone far worse than surely even the most cautious of its backers had feared might be possible.
Aston Martin is forecast to scrape by with a tiny profit this year, but analysts have a big leap in profits pencilled in for 2020, and that would set the P/E multiple for the stock at a respectable 14.5 or so. But it’s all dependent on the success of the firm’s new models, like the upcoming DBX SUV.
The history of luxury car development is littered with the corpses of great new hopes, and I fear when we look back in a few years time we’ll see another one. How low could the share price go? Aston Martin has gone bust seven times in its 106-year history, and I think we could well be heading for the eighth.
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Alan Oscroft 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.