Down 78% in one year, could Aston Martin’s share price still be a value trap?
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luxury car manufacturer Aston Martin (LSE: AML) is good for making cars that move at high speed. Aston Martin’s share price has also been moving at high speed lately, but in reverse. Over the past year, it has collapsed by 78%.
Despite this, I still fear that stocks are a value trap and I will not buy them for my portfolio.
A good deal but a bad investment
A costly mistake that many new investors make is to confuse a company’s potential with its attractiveness as an investment. I think Aston Martin is a good example of that.
The company itself has a lot to love. Its iconic brand is loved by car enthusiasts around the world, allowing the company to charge high prices. Volumes are quite low, which means there is room to grow in the future. In recent years, the company has diversified into sport utility vehicles, expanding its potential customer base.
But if the company has these attractive attributes, why do I think it might be a value trap if I invest in it? It’s because of the way it’s financially structured. The company’s balance sheet is bloated with debt. At the half-year stage, net debt had risen to £1.3 billion. Even if the company does well, the need to repay that debt could keep Aston Martin’s share price depressed.
The woes of the balance sheet
The automaker has a plan to deal with its problematic balance sheet, however.
Aston Martin today announced that it has raised approximately £576million in a rights issue. This could help reduce debt and improve the company’s liquidity cushion. I have my doubts, however, about how transformative it can be. The company plans to use no more than half of the new funds to reduce debt. So I expect net debt to remain high for the foreseeable future.
But the downside is that the rights issue will heavily dilute existing shareholders, not for the first time in several years. I have long viewed additional dilution as a risk of owning Aston Martin shares and it has happened.
Stock price crash
After falling 9% on today’s news at the time of writing, Aston Martin’s share price is now 96% below where it was listed on the stock market just four years ago . Part of this drop reflects the huge dilution in equities seen during this period.
Despite this drop, I continue to avoid adding stocks to my portfolio. The rights issue will help strengthen Aston Martin’s finances and investors alike Mercedes-Benz buy. But they can have strategic goals, not purely financial goals like me.
What I see is a company with a lot of debt, a history of massive shareholder dilution, and risks like a recession hurting sales. Management has been cut and changed several times in recent years and I lack confidence in the investment case from a small private investor’s perspective. Even at this point, I see it as a potential value trap. The collapse in Aston Martin’s share price does not tempt me to buy for my portfolio.