Anyone following the Aston Martin (LSE:AML) share price will know the company has had a horrid 2020.
But could shares in James Bond’s favourite carmaker be about to soar? Should you buy now? I’ll investigate the case for and against.
Looking at a recent chart of the Aston Martin share price it appears to have hit a floor or ‘bottom’ at just under 50p. This is a trading term that means there is a lot of support at this price level.
The Aston Martin share price has deflated 70% since the start of 2020. And it has fallen over 96% since its October 2018 IPO at a whopping £19 per share. So is there value in buying 50p bargain shares now?
Why the Aston Martin share price could rise
Reuters reported on Thursday 15 October that Daimler — the parent company of luxury brand Mercedes-Benz — saw sales bounce back in September 2020.
Data from the European Automobile Manufacturer’s Association released this month shows EU car sales rose 3.1% in September. This is the first increase of the entire year, and suggests a potential sector-wide recovery.
And as a fellow brand that appeals to the affluent, Aston Martin could see the same kind of sales and revenue bounce. That’s what speculative buyers are betting on ahead of the company’s third-quarter 2020 results, which are due out on 12 November.
There is an argument, too, that luxury car brands should be relatively unaffected by a pandemic that has wrought economic catastrophe on large swathes of the world. These brands cater to the super-rich, after all, who tend to be more insulated from economic shocks.
The DBX is Aston Martin’s first ever luxury SUV.
This is a section of the car market that exploded in popularity in the late 1990s with the likes of the Mercedes-Benz M-Class. The higher profit margins available from luxury SUVs were too great to ignore.
Even sniffy racing-focused brands like Porsche eventually had to concede. In 2003 it launched the Cayenne, to much handwringing about how the brand had lost its soul. But it was a sales hit. A big one.
Far from a disaster, it pushed Porsche back into profit from big losses.
Investors are hoping for the same from Aston Martin, only 20 years late to the party.
Why the Aston Martin share price could fall
Aston Martin has massive debt. Estimates have been reported in a range from £765m on a trailing 12-month basis to in excess of £880m. And a September 2019 fundraise of $150m to finance the cost of producing the DBX has made its future borrowing costs higher. Most of this borrowing matures in 2022. It could be refinanced, of course, but it will be expensive.
This puts immense pressure on the company’s balance sheet – and the Aston Martin share price, in tandem.
JP Morgan analysts suggest the high development costs of the DBX mean one thing. Aston Martin will burn cash at an alarming rate.
In a recent client note the bank upped its 2020 estimate for cash burn to £150m and dropped earnings projections by 10%. Much more medium-term cash is needed and the outlook “remains uncertain“, it said.
So a bet on the Aston Martin share price rising with positive results on 12 November is just that: a speculative bet. As the saying goes, you pays your money and you takes your chances.
TomRodgers 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.