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Since last week, the Aston Martin Lagonda Global Holdings (LSE: AML) share price has plunged nearly 19%.
Even in a weak market, that seems like a great move. So is the dip a buying opportunity for investors?
Let’s start by putting the fall into perspective. With the share price nearing 242p, the luxury sports car maker is around 26% lower than it was a year ago.
But investors liked this month’s full-year earnings report. And shares jumped nearly 50% on his post. So the stock has been volatile.
But it’s worth noting that the company is not making a profit right now. However, City analysts predict smaller losses for this year and next. And the company’s annual revenue has been increasing.
There may be gains ahead
If those trends continue, the business may become profitable for years to come. However, there is a good part of the debt on the balance sheet. And without earnings, the interest on the loans can become problematic.
Therefore, it is not ideal for the business to have cyclical characteristics. And any prolonged general economic downturn that looms may cause a headache for the company.
This month’s full annual report showed increasing losses year-over-year for 2022. But there was strong performance in the fourth quarter. And revenue was higher, with managers reporting strong demand across the company’s portfolio of product lines.
About 80% of the current range of GT/sports cars have been sold by 2023. And the business has weathered well the supply chain disruption that was a feature of the economic landscape last year.
Looking ahead, the company said it expects significant growth in profitability in 2023 compared to 2022. And that means cutting losses. City analysts have noted a net loss of £152m.
But if that result happens, it will be a vast improvement on the nearly £528m the company lost in 2022.
Continued brand strength is key
Directors said the improvement in the situation will be driven by increased volumes and higher gross margin in basic and specialty vehicles. It looks like capex will peak in 2023. And positive free cash flow should happen in the second half of the year.
Meanwhile, without earnings it’s hard to put a valuation on the business. However, the price/book ratio is not outrageous at the current level of around 2.3.
But in the future, the profits could come. And that can happen quickly if things work out for the company.
Brand strength is key to future performance. And as long as customers continue to see the cars as special, I think the business can build on its recent gains.
Therefore, the recent weakness in stocks may be a buying opportunity. But with a losing trade like this, thorough research is essential before buying shares.
Investors must generate conviction about the potential of the business to be sustained in the long term. But I believe that this month’s positive results report is reason enough to dig deeper into the situation.
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