The price tag of an Aston Martin (LSE: AML) is not for the faint-hearted (or, more to the point, the shallow-pocketed). Buying one of the manufacturer’s Valkyrie cars will set you back considerably more than £2m. Sounds like a lot of saving? Fear not. The model is already sold out.
But given the company’s ability to create strong demand for very expensive cars, why has the Aston Martin share price cratered 78% in a year? Can it go even lower – or should I be spending money on the company’s shares instead of saving up for one of its cars?
Stock market valuations
The answer to the first question is very simple. Any share price above zero, no matter how low it has gone, can always go lower.
But why would a business selling at least some of its products for millions of pounds each see its shares fall so much? The reason is that there is a difference between a good underlying business and a potentially lucrative investment.
Imagine that someone came up to me today and gave me the keys to Aston Martin’s factories. “Here,” he said, “you can have it all. Property, equipment, trademarks, the lot”. Would that be good for me or bad? After all, that is somewhat similar to the ownership position of a company’s shareholders.
The problem is that I could not pick and choose, for example taking the equipment but rejecting the property because then I would have to meet lease obligations. Remember, I am being offered “the lot”. So, as well as Aston Martin’s assets, I would also be taking on its liabilities.
Dilution risk
As a shareholder in a limited company, the situation is different. I could invest at today’s Aston Martin share price without ever having any liability for the carmaker’s obligations.
But they are still on the company’s balance sheet. If Aston Martin struggles to pay its debts, for example, it may issue more shares and dilute existing shareholders. Indeed, it has heavily diluted shareholders over the past several years, reducing the size of their stake in the firm. That happened again just this month – and I see a risk the same could happen again.
The balance sheet
That is because the company has taken on a lot of debt. At the interim stage this year, net debt stood at £1.3bn. Debt can be expensive to service let alone pay down.
The operational business is strong. If the company fixes its balance sheet, Aston Martin could turn out to be a rewarding investment for me. But it is saddled with obligations that could eat up profits far into the future. One way for the company to deal with that is to raise funds by further diluting shareholders.
The share price is a possible value trap
That is why I think the Aston Martin share price, even after its heavy fall, might decline even further. I see no specific reason to believe that it has reached rock bottom.
A weakening pound and worsening economic environment potentially hurting sales could mean the company faces ongoing challenges. Even the current share price could turn out to be a value trap, given the debt load. So I will not be adding Aston Martin to my portfolio.