Aston Martin Lagonda (LSE: AML) shares revved up briefly after yesterday’s half-year report, as investors bought the stock on turnaround hopes. But this week’s numbers suggest to me Aston Martin’s share price is very unlikely to return to its pre-Covid level of 100p+ anytime soon.
Indeed, I think shareholders could still suffer further losses. Aston’s sales have fallen by 64% this year and this debt-laden group is still running at a loss. Although sales should be stronger next year, analysts still expect the group to report a hefty £112m loss in 2021.
However, although I’m worried about the risks facing shareholders, I do think we could see a successful turnaround at this legendary firm.
Good news at HQ
Indeed, I’m pretty sure Aston Martin’s chances are much better than they were a year ago. The long-awaited DBX SUV is now in production. And the arrival of executive chairman Lawrence Stroll has provided a fresh injection of cash and paved the way for an experienced new chief executive.
New boss Tobias Moers was previously in charge of Mercedes’ AMG division. As I’ve discussed before, AMG’s sales quadrupled under Moers’ leadership. I think he’s an excellent choice for Aston Martin, which already uses a fair amount of Mercedes tech in its cars.
I’m also encouraged by Stroll’s clear-headed strategy. He’s clearing stock from dealers to balance supply and demand and position the firm as a genuine luxury brand. That means you’ll have to order a new Aston and wait for it to be built — dealers won’t have rows of unsold cars.
Scarcity drives price and desirability higher in the luxury market. I agree it’s worth taking some short-term pain on price-cutting to clear the firm’s backlog of unsold cars. In the long run, this should be good for profit margins — which could help Aston Martin’s share price.
Good news from China
There’s more. Lockdown hit car dealerships hard, but sales are recovering. At least they are in China, which is one of the most important markets for luxury goods. According to Aston’s latest numbers, retail sales at Chinese dealers are now 11% ahead of the same time last year.
We’ll have to hope that UK and US dealerships perform similarly well as they reopen.
Why I still think Aston Martin’s share price will fall
Aston Martin is a great brand with a strong following. I can’t see that changing. The brand’s entry into Formula One next year should help marketing too.
But a turnaround won’t necessarily save shareholders. Although the firm raised £688m of new cash from shareholders during the first half of the year, this only reduced the firm’s net debt by £237m. Aston is still spending more cash than it’s collecting from buyers.
This situation should improve during the second half of the year, as sales of the DBX gather pace and spending is reduced. But I don’t think it’ll be enough. This company has gone bankrupt seven times before. I think it could happen again.
I certainly don’t expect Aston Martin’s share price to return to 100p in the foreseeable future. The firm’s cars may be able to command a luxury price tag, but I think its shares should stay in the bargain basement.
Roland Head 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.