We may only be a couple of weeks into 2020, but that hasn’t stopped there being plenty of newsworthy stories in the financial markets. For Aston Martin Lagonda (LSE: AML), it has already had enough coverage to last it several months!
For both good and bad reasons, the share price for the firm has been on a roller coaster ride thus far in January, the latest of which was a 13% rally in trading on Friday. But why did it happen?
Starting in first gear
The year opened for Aston Martin with its share price just under 550p. The price fell sharply though, thanks to a profit warning, with CEO Andy Palmer commenting that “our underlying performance will fail to deliver the profits we planned“. The company said it was hit by “lower sales, higher selling costs and lower margins“.
As far as business 101 goes, that is a lethal (but fairly basic) cocktail of how to not have a successful business. If your revenue falls and your costs increase, not only will you have lower profit margins, but ultimately less profit itself. This can be seen with the profit warning, as Aston said it expects to make £130m-£140m in profit, down from analysts’ expectations of £196m.
The end result was the share price falling as low as 407p this week, down almost 26%.
Foot to the floor
The contrast was startling though with trading on Friday when the share price accelerated 13% higher in a single day. The main driver of this was the news that Chinese carmaker Geely was planning to buy into Aston.
You may not be too familiar with Geely, but the company owns household car brands such as Volvo and Lotus, and so is well known in the automotive space.
This move, which the firm says is at a due diligence stage, could be the shot in the arm that Aston needs. Aston has acknowledged that raising additional funds via debt or equity is likely to be needed in order to keep operations flowing.
Raising money via debt can be very expensive, with rumours that the latest $100m of funding Aston is looking to take on is going to attract a 15% interest rate. Bearing in mind the base rate here in the UK is 0.75%, the risk premium to take on this debt is huge.
However, the market took the interest by Geely and some other potential investors as good news, and faith that Aston can be turned around by some outside help.
From here, I would say that Aston could present a good buying opportunity for investors. The raising of new funds will be expensive, but if it allows strategic investors to come on board then the experience this brings could help Aston kick on. Looking towards the longer term, it is to be hoped that a couple of admittedly-bad years in the public space do not have to tarnish a business that has made some steps forward since the IPO in 2018.
Jonathan Smith and 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.