The Motley Fool

The Aston Martin share price has skidded again. Here’s what I’d do

Image source: Getty Images.

Last week was one of contrasting fortunes for investors in luxury car maker Aston Martin Lagonda (LSE: AML) and roadside assistance firm AA (LSE: AA). The former’s shares plunged 10% late Friday on the Financial Times reporting the company was seeking to raise fresh capital.

Meanwhile, AA, whose shares soared 16% after a trading update on Wednesday, saw a further 7% boost on Friday, as UK domestic stocks surged on the Conservative Party’s landslide election victory.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Is AA now firmly on the road to recovery? And could Aston Martin be poised to accelerate out of its latest slide?

Fundraising on the cards

Late on Friday, Aston Martin issued a statement in response to “recent press speculation.”

It said: “The company confirms that it is reviewing its funding requirements and various funding options. It is also engaged in early stage discussions with potential strategic investors in relation to building longer-term relationships which may or may not involve an equity investment.”

I think an equity fundraising is very much on the cards, because of a toxic combination of Aston Martin’s high debt and challenging trading conditions.

The name’s bond — junk bond

Last month, the company reported a £35m net cash outflow over the nine months to 30 September. This was despite it bringing in $150m from issuing junk bonds on which it will be paying 12% interest.

Net debt at the period end stood at £800m, an eye-watering 5.5 times trailing 12-month EBITDA. And with the balance sheet also showing negative net current assets of £381m, I’d say credit rating agency S&P is on the mark in suggesting the company “has reached the ceiling in terms of the amount of term debt and cash interest burden that it can sustainably service.”

Due to Aston Martin’s fragile balance sheet, and notwithstanding high hopes for sales of its first SUV next year, I see a high risk of a fundraising and significant dilution for existing shareholders. Personally, if I owned the shares, I’d be selling at 557p.

Continuing momentum

The strong rally in AA’s shares last week — to 52.4p — means they’ve climbed 27% from an all-time low of 41.4p reached less than a fortnight ago. In a trading update on Wednesday, the company said positive operational momentum reported in its first-half results has continued into the second half of the year, and that it expects EBITDA and free cash flow for the full year to be in line with market expectations.

It also said it intends “to use some of the cash generated to buy back and/or tender for outstanding bonds in the market (potentially imminently),” and that subject to market conditions, “it also intends to pursue a range of debt tenders, redemptions and issuances over the coming months.”

The D-word again

Even after the surge in its share price, AA trades at just 3.7 times current-year forecast earnings. Why so cheap? Well, it’s the D-word again. The company had net debt of £2.7bn at the half-year-end, with leverage at 7.8 times trailing 12-month EBITDA.

I’ve long been bearish on AA due to its sky-high level of debt, and while management intends to use some of the cash the business is generating to reduce the outstanding bonds, I’d want to see a serious reduction of the debt pile before shifting from my current stance of avoiding the stock.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

G A Chester 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.