There is little appeal to shelling out on an expensive sports car and then only driving it in reverse. But over the past year, Aston Martin (LSE: AML) has been firmly stuck in reverse gear. During that period, the Aston Martin share price has fallen 47%. That comes on top of previous poor performance. Shares now change hands for only 11% of what they cost when the company floated less than four years ago.
Could the recent poor performance be a good chance to add the luxury carmaker to my portfolio at a knockdown price?
Multiple challenges
The Aston Martin share price collapse reflects a number of challenges.
Building the high end cars at the pinnacle of the company’s portfolio has turned out to take longer than expected. That led the company to warn on profits last month, although it emphasised that the small number of cars in question had all been sold, so the profits, although delayed, should still materialise eventually.
To shore up liquidity over the past couple of years, the company took a number of measures. One of those was issuing new shares. That heavily diluted existing shareholders and I see a risk of the same thing happening in future if the carmaker faces another liquidity crunch. The company also borrowed money, but its precarious situation meant that lenders demanded high interest rates. That is bad news for profits, as they are now reduced by sizeable interest payments. The company has said it expects last year’s cash interest bill to total £120m, for example.
Bright spots
Despite the financial challenges and some production delays in the supercar range, there is clearly a business transformation under way at the company. Wholesales last year showed an 82% increase compared to the prior year. The company’s DBX model now has an estimated 20% market share of the luxury sports utility vehicle market, suggesting Aston Martin’s gamble in launching it is paying off.
Retail demand has also been high and the company’s renewed marketing efforts have helped emphasise the brand appeal to well-heeled buyers. Cost controls have also helped improve liquidity, with a cash balance of £420m at the end of last year exceeding expectations.
My move on the Aston Martin share price
However, despite the reasons for optimism, I see two different stories here at the same time.
One is the story of underlying business performance, which I think is positive. Sales are booming, demand is high, and the company’s range of models clearly has appeal in its market.
But the second story is one of how that business performance sits within a listed company saddled with high debt. Even if Aston Martin maintains its recent strong sales performance and cost control, I expect that servicing debt will use up a lot of its earnings for several years at least. That means that the improvement in the underlying business performance will not necessarily translate into an improving share price, as we have already seen. For that reason, I will not be buying Aston Martin shares for my portfolio.