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Investors are taking a gamble on the Aston Martin share price: Here’s what I’d do

A month ago, it looked like Aston Martin Lagonda (LSE: AML) was in serious trouble. From a a flotation price of 1,700p back in September 2018, the Aston Martin share price had dropped below 30p. And for a change, it wasn’t down to the Covid-19 crisis.

But since then, the shares have put in a recovery that I simply would not have believed. From that dip, the Aston Martin share price has more than doubled. In fact, it’s up 140%, having even briefly blipped above 150%. It’s rare that investors see that kind of return in a month, but a market crash does increase our chances.

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Investors are clearly starting to see good things here, and are gambling on this strength continuing in the long term. Given that analysts are still forecasting at least two years of losses for the luxury car maker, the gamble is definitely risky. But is it one worth taking?

New boss

The catalyst for the Aston Martin share price comeback came from an announcement on 26 May. Chief executive Andy Palmer was stepping down, to be replaced by Tobias Moers. And if you don’t know who he is, he was CEO of Mercedes-AMG. So I can understand the excitement. But it all depends on whether he can turn the company around, and on how he is going to do it.

Aston Martin’s problems, to state the obvious, stem from not selling enough cars. The company’s ambitions, and its design and production capacity, were befitting a bigger firm with higher turnover. But without sufficient sales, those apparently good things simply generate unsustainable expense. The firm had to either increase sales or cut costs, but efforts to achieve the former have been failing. As a result, the Aston Martin share price slid inexorably to where it was last month.

Streamlining

The only way to survival surely has to be to cut costs and slim the company down to a smaller and fitter operation. And that’s what the new boss appears to have grasped, saying that “the plan requires a fundamental reset which includes a planned reduction in front-engined sports car production to rebalance supply to demand“.

Job losses are an unfortunate part of the remedy, expected at around 500. Hopefully, that should bring the employee count into line with realistic production expectations, not with the grandiose dreams the board appeared to have at the start. And hopefully the Aston Martin share price trajectory will continue on its recent reversal.

But while this new strategy is welcome, it’s far from a guaranteed success just yet. Reductions in operating costs and capital expenditure will obviously have to be sufficient to bring them significantly below expected revenues. And we’re really not confident in what those revenues are likely to be yet.

Aston Martin share price?

So would I buy Aston Martin shares now? In a word, no.

I do think there’s a viable business here. And I’ll cross my fingers for those brave investors taking the plunge. But right now, my biggest fear is that the cash will run out again before we see profits. Another equity raise would dilute existing shareholders, possibly significantly.

No, the Aston Martin share price does not tempt me yet. But there are plenty I would buy now…

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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.