In 2018, Aston Martin (LSE: AML) launched its IPO with shares priced at £19. Fast-forward two years and shares have fallen 96%, currently priced at just 72p. This has been the result of extreme stock dilution, alongside poor management and a balance sheet loaded with risk. The pandemic has further exacerbated this pain, with the share price dropping 87% this year. But does this mean that Aston Martin shares are now far too cheap or are they a deadly value trap?
What has caused the share price decline?
While Aston Martin may be one of the most illustrious names in car making, this has not been backed up by financial success. In fact, the company (which is now over 100 years old) has gone bankrupt seven times and has a long history of restructurings.
Since Aston Martin’s IPO in 2018, life has been miserable for the company. This has been due to both poor decision making and difficult global economic conditions. For example, although Andy Palmer was able to return the brand to profitability in the early years of his tenure, since the IPO, it has seen consistent losses. This is not expected to reverse any time soon, especially with operating losses so far this year standing at over £200m.
Alongside the losses, debt has also ballooned. In the recent trading update, it reported net debt of £869m. This is an incredibly large amount, especially for a currently unprofitable company. Fears among creditors have also led to extremely large interest rates, with some at over 10%. Such a significant amount of debt will undoubtedly place a strain on the Aston Martin share price over the next few years.
A glimmer of hope
Despite all this negativity, certain bits of good news have led to optimism. For example, in May, Andy Palmer stood down as CEO of the company, and this has injected new life into the company. New leadership includes Tobias Moers, who spent more than 25 years in senior roles with Daimler AG, and the new executive chair, Lawrence Stroll. Billionaire Lawrence Stroll has injected large amounts of personal money into the company in return for a large stake, while also stating that he is enthusiastic and confident about the future. Since the new leadership has arrived, Aston Martin shares have doubled in value.
Other recent good news includes the fact that Mercedes-Benz is looking to increase its stake in the company to 20% over the next few years. This is accompanied by a strategic technology agreement between the two, which should help the pair develop various vehicle components and systems. Such a partnership may prove vital in the long term and may help reinvigorate the share price.
Would I buy Aston Martin shares?
It does seem that Aston Martin shares are far too cheap at the moment, especially when considering the overall value of the brand. As such, for those willing to take on risk, now may be the perfect time to buy this iconic car manufacturer. Despite this, I’m staying away. The company is riddled with debt and unprofitable. While there is no doubt that it is also cheap, I believe that there are still far better options out there.
Stuart Blair 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.