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Aston Martin or Rolls-Royce shares? Here’s what I’d do

Image source: Aston Martin

March’s market crash saw the share price of both Aston Martin Holdings (LSE:AML) and Rolls-Royce (LSE:RR) plummet. On the surface, most would connect both companies to the luxury automotive industry. However, while Aston Martin is still manufacturing cars, Rolls-Royce sold that side of its business 40 years ago and has since focused (mostly) on aviation.  

Aston Martin Shares

Since it was first listed on the London Stock Exchange in October 2018, the Aston Martin share price has dropped by 95% (admittedly, partly due to dilution). My colleague G A Chester is very bearish on the share, saying: “There’s not a cat in hell’s chance the Aston Martin share price will ever return to £19”. That may be so, but now that the company has dropped from 499p at the start of February to its current 80p — which it has roughly maintained since April — is Aston Martin a good investment today?

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Well, relatively new executive chairman Lawrence Stroll seems to think so. His investment fund spent millions on a 25% stake. He has streamlined the company’s operations and announced a plan to target £2bn of revenue by 2025. However, I think there are many reasons to avoid Aston Martin and look at Rolls-Royce shares instead.  

The brand is, first and foremost, not currently profitable. Then, even if Stroll’s plan works, AML has to work its way through a mountain of ever-increasing debt, and certain concerned lenders have hit it with a 10.5% interest rate. This doesn’t bode well for shareholders looking for dividend payouts and trying to avoid being diluted further.

On top of all of that, Aston Martin has a history of issues that includes major, consistent losses and seven bankruptcies. I think it’s best avoided.

Rolls-Royce Shares

While notable, the Covid-induced price change in Rolls-Royce shares (down 62% between February 2 and April 2) was less dramatic than that of Aston Martin. It’s currently worth around 100p, with its price rising since Covid vaccine developments were announced.

An interesting distinction between Rolls-Royce and Aston Martin is the necessity of their services. Cars were still needed during the pandemic, planes (for the most part) weren’t. As the world returns to normal, Rolls-Royce’s business should pick up and hopefully its share price will follow suit. Aston Martin might not experience that to the same degree, although a recovery in the luxury sector would help it. Furthermore, Rolls-Royce CEO, Warren East, has announced a confident recapitalisation plan and a £750m free cash flow target for 2022 onwards. When compared to its current price, this much free cash flow would make for good share value.

That said, there are many drawbacks. The company is predicted to make a loss of more than £2.5bn this year, while Edward Sheldon views it as a ‘low-quality’ stock due to a track record of loss and a distinct risk of future financial issues. He also points out that, even though the airline industry returning to normal will help Rolls-Royce shares, we shouldn’t bank on this happening for a good few years.

As a result, I wouldn’t be too keen on buying Aston Martin or Rolls-Royce shares right now. However, if I was looking for a long term investment and was okay with a little risk, I’d lean towards Rolls-Royce.

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Dan Peeke 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.

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