Sports car maker Aston Martin Lagonda (LSE: AML) is a great luxury brand, but the firm’s finances look like a car crash to me.
City investors seem to agree. Since the firm floated on the London Stock Exchange last year, heavy selling has caused the share price to fall by nearly 70%.
The group’s problems are simple enough. It’s not selling as many cars as expected, debt is rising and cash generation is poor. Today’s news confirms how desperate the company’s situation is, in my opinion.
What’s happened? Aston Martin has raised $150m of new debt at an annual interest rate of 12%. It’s due for repayment in 2022, adding to approximately £750m of existing debt that’s also due to be repaid in 2022.
Why I think this is bad news: The firm’s borrowing costs are rising fast. In 2017 it was borrowing money at about 6%. Now it’s paying 12%. This suggests to me that lenders are getting worried about the company’s ability to service and repay its debt.
Debt is too high: In my opinion, the firm’s last-reported net debt of £732m was already too high. Adding to this pile looks risky to me, but my understanding from today’s announcement is that the new loans were needed to free up cash for day-to-day operations.
When a company uses long-term debt to meet short-term financing needs, I see that as a warning that its financial position is probably very weak.
Will Aston Martin go bust again? Management hopes that spending on new models such as the upcoming DBX SUV will generate strong sales growth and a big boost in profits. But earlier this year, the company reported “difficult market conditions” and an operating loss of £35m for the six months to 30 June.
Aston Martin has already gone bust seven times in its 106-year history. If sales remain subdued, I think the company could run into trouble again.
If that happens, the share price could have a lot further to fall. In my view, Aston Martin is a risky and speculative stock that’s best avoided.
The stock I’d buy instead
If you want to benefit from the growing wealth of middle class consumers around the world, I think that FTSE 100 cruise ship operator Carnival (LSE: CCL) could be a much better choice.
The Carnival share price is down by about 30% from a high of more than £50 two years ago, but in this case I think the sell-off has created potential value for dividend growth investors.
Carnival’s brands include Princess, P&O, Cunard and Holland America. It’s the largest cruise operator globally and carries passengers from all over the world, including the fast-growing Asian market.
Net sales rose by 5.2% to $3.8bn during the first half of the year, excluding the impact of exchange rates. Although the firm has been forced to cut profit guidance for the year due to a number of one-off factors, cash flow remains strong.
Trading on 10 times forecast earnings with a dividend yield of 4.4%, I think Carnival stock is starting to offer good value. I’ve added the shares to my watch list as a possible buy.