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The most attractive and fastest of Aston Martin (LSE: AML) for most of the last few years it has been their cars. Aston Martin’s share price has been going downhill rapidly for much of the time, falling 59% in the last year alone.
But in a shorter time frame, things have looked better. In fact, the automaker’s stock has more than doubled since early November. I did not expect such a rapid promotion. So was I wrong not to buy a piece of the company earlier, and might it make sense for me to invest now?
Why have I been bearish?
I have always been pessimistic about Aston Martin’s prospects. That has been mainly due to its business model.
Burdened with debt, he now faces high interest costs, plus the need to pay off his loans at a future date. That runs the risk of greatly affecting profitability. It also increases the risk that the company will try to raise funds by diluting shareholders, something it did last year.
On top of that, the basic economics of the business currently don’t appeal to me, even if you set aside the massive amount of debt. In the first half of last year, for example, the operating loss was £90m. Interest costs are on top of that.
Reasons to be optimistic
But have I been too pessimistic in my analysis of the company’s prospects? After all, Aston Martin’s rising share price suggests that some investors believe it was seriously undervalued a few months ago.
The business definitely has a few things going for it that could help future business performance. The brand is iconic and has a loyal and wealthy fan base. The business has been changing its product and price mix, which could improve profitability. In its most recent quarter, for example, revenue grew 33% year-over-year despite wholesale volumes only increasing 3%.
The company has attracted money from investors who are experts in the automotive sector, including Mercedes Benz. While that might be a strategic investment rather than a purely financial investment, I still see it as a vote of confidence in Aston Martin’s prospects.
Safety margin
One of the concepts Warren Buffett uses when investing is to always have a margin of safety when evaluating a company’s prospects.
I could have doubled my money investing in Aston Martin over the past few months. But the company’s business prospects didn’t convince me in November and, to be honest, nothing has happened since then to change my mind.
With momentum building and investor enthusiasm, Aston Martin’s share price may continue to gain ground rapidly.
But I don’t trust the probability of that. In fact, I think the stock could well pull back. Aston Martin has been massively destructive of shareholder value in recent years, even including the recent price increase.
The share price has fallen 96% since the company’s listing on the stock market in 2018. Past performance is not a guide to what will happen in the future, but the company continues to lose cash and post heavy losses. I see no margin of safety for myself in such a situation. I will not be investing.
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