Making high-quality goods is no guarantee of a successful business — just ask Aston Martin Lagonda (LSE: AML). The Aston Martin share price was looking tentatively positive at the beginning of 2021. We had new management and what looked like a realistic new focus.
But 2022 has not been kind. By the start of September, Aston Martin shares were down 95% from their IPO in 2018. And then things got worse…
Share price slump
On 5 September, the Aston Martin valuation slumped again, as a result of a new four-for-one rights issue. It means that over the past 12 months, the shares are down around 90%. Since IPO, we’re looking at a 98% loss.
But there has to be a price at which any share is worth buying, doesn’t there? Are we now looking at a no-brainer recovery buy?
To answer my first question, no. Some shares are not worth buying at any price. If a company is going bust, then its shares will lose all their value. So if I think there’s a good chance of this happening, that’s precisely what I’d pay for the shares — nothing.
Win or lose
But now for my second question. Is Aston Martin a no-brainer buy now? I reckon the company could either go bust, or it could recover and the shares could some day be worth a significant multiple of today’s price.
As an aside, Aston Martin has previously gone bust seven times throughout its history. That has no bearing on the future, but I thought it was worth getting out of the way.
What was the latest rights issue all about? The last round of refinancing in late 2020 left the company with a lot of debt, and it says the new capital raise seeks to address that. Up to half of the new cash will be used to repay existing debt — though it’s not clear what ‘up to’ might mean.
Transformation
The company also says it is “now at the beginning of the second phase of its transformation, which is focused on increasing profitability and renewing its product offering, including electrification of the Group’s model range which is fundamental to its future success and growth strategy“.
These words are all very well, but I want to see numbers. And the board did give us some. Aston Martin’s medium-term targets, apparently, are “approximately 10,000 wholesales, approximately £2 billion revenue and approximately £500 million adjusted EBITDA by 2024/25.”
The company reckons the new funding “strongly positions it for positive free cash flow generation from 2024.”
No-brainer?
So does the current Aston Martin share price make it a no-brainer buy? No, not for me.
If the targeted level of adjusted EBITDA is achieved, it could turn this stock into a winner. And I do think the company has a potentially good business with strong long-term demand.
But a lot needs to be done, including that electrification programme. And that will take a lot of hard work and money. Will the latest cash last until we see positive free cash flow? I’d expect any future fundraising to bring even more share price pain.
On that risk, I’m steering clear.