Looking back on the Aston Martin (LSE: AML) floatation four years ago, it is difficult to remember what investors were once willing to pay for the carmaker’s shares. Since then, Aston Martin shares have lost 97% of their value. In the past year alone they are down 83%.
So does it make sense for me to buy into the company now? Or could these already battered shares sink even lower?
Valuing the shares
I think the answer is that the shares could yet sink lower. In part, that is simply the application of a general principle, which is that shares can always get cheaper. Just because a company’s shares have fallen a long way does not mean that they cannot fall even further.
But I also see reasons to be bearish about Aston Martin shares specifically. The company has a large debt pile. It ended the first half with £1.3bn in net debt, a jump of almost half a billion pounds from the same point last year.
Total wholesale volumes in the first half fell 8% compared to the same period last year, even though Aston Martin has an aggressive plan to increase sales in the next several years. Its pre-tax loss also soared in the first half compared to the same period last year, coming in at £285m.
None of that sounds good to me. The company is burning cash and normally that means one of two things. Either the business needs to fix its economics – which could help boost the share price – or at some point it will need to raise yet more cash. That could dilute existing shareholders and push Aston Martin shares even lower.
Outlook remains unclear
So which of those scenarios is most likely? I think the answer is unclear. From a bullish perspective, Aston Martin has expanded its range of models and invested heavily in marketing over the past couple of years. At the interim stage, the company said it remains on track to achieve its medium-term targets.
Those include around 10,000 wholesales and approximately £500m of adjusted earnings before interest, tax, depreciation and amortisation by 2024/25. If the luxury carmaker can deliver on those targets, that could boost its shares.
Bear case
However, I am concerned that Aston Martin shares might sink still lower. Given the sluggish revenue growth seen in the first half, I wonder whether the company’s ambitious short-term sales targets are realistic.
I also continue to be concerned by the debt pile. Interest is a real expense Aston Martin needs to fund, not just an accounting line item. The company forecasts the cash cost of interest payments this year alone will add up to £130m. The debt will continue to act as a drag on profitability which, again, could hurt the share price.
I’m not buying Aston Martin shares
With an unclear outlook and lack of a business model that is proven to be profitable, I think Aston Martin shares could get even cheaper than they are now.
The risks are too high for my taste and I have no plans to invest.