Value investors aim to buy terrific companies at low prices. The overall market’s panic is providing value investors with plenty of opportunities at the moment.
The carmakers of the world seem to be an undervalued sector. However, some analysts, including those from J.P. Morgan, consider carmakers to be worth buying. According to them, the current manufacturing downturn will not last forever.
Now could be a great opportunity to buy after the stock market’s crash. But, to be successful as a value investor, it is essential to exclude loss-making companies.
Such a company seems to be Aston Martin Lagonda (LSE:AML).
Aston Martin’s brand
Aston Martin has always been a symbol of a posh lifestyle, and is famously associated with James Bond. It has an extremely strong brand.
It seems that companies producing exclusive sports cars are not particularly vulnerable to tariffs and similar threats, because brand loyal customers are not very sensitive to price changes.
This might lead you to think that if the UK government fails to reach a trade deal with the EU and tariffs get levied on British goods, Aston Martin’s sales in Europe might not suffer a substantial fall. Of course, it is difficult to predict the consequences of Brexit.
What is happening to the company right now and why?
Despite significant consumer brand loyalty, Aston Martin’s sales revenue fell by 9% between 2018 and 2019. This decline was not just due to the factors that affected the sector overall, such as declining car sales in China and tougher trading conditions in Europe.
It sounds absurd, but Aston Martin’s deteriorating financial results can be partly attributed to rising direct sales of the Vantage, its entry-level sports car. Aston had to spend more on dealership bonuses and higher financing costs, because many customers prefer to lease their cars instead of buying outright.
In addition, Aston experienced a decline in wholesale deliveries even though direct sales to consumers kept increasing.
The rising pound sterling ahead of and during the UK election also had a negative effect on the carmaker’s sales revenue. As I noted above, customers determined to buy an Aston Martin car may not be particularly price sensitive, but car dealerships generally are very price sensitive. And, consider that a would-be Aston Martin owner’s wealth might be greatly affected by currency changes.
Investment perspectives
The company only reported a profit of £76.8m in 2017, whereas 2018 – called “successful” by management – was marked by a loss of £57.1m. Year 2019 was even worse. The loss totalled £104,4m, which means that the company’s loss rose by 83%.
Moreover, the company’s net debt has risen from £559.5m in 2018 to £876.2m in 2019. This means that Aston has become more indebted, and a more risky investment, even though the shares are trading near their 52-week lows.
Needless to say, this company has never paid a dividend.
Finally, Aston Martin’s outlook is even less promising than its current financial position suggests, since the company expects wholesale sales to decrease further.
This is what I would do
I would personally stay away from Aston Martin’s shares and invest cash into companies with better fundamentals.