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A luxury car maker Aston Martin (LSE: AML) is good at making high-speed cars. Aston Martin’s share price has been moving at a high rate lately, but in reverse gear. It fell by 78 percent last year.
Still, I fear the shares may be a value trap and not a buy for my portfolio.
Good business but bad investment
One costly mistake many new investors make is confusing business with its appeal as an investment. I think Aston Martin explains this well.
The business itself has a lot to like. The famous brand is loved by motor enthusiasts around the world, which allows the company to charge premium prices. Sizes are fairly small, which means there’s room to grow in the future. In recent years, the company has expanded its customer base and branched out into sports utility vehicles.
But if the business has these attractive features, why do I think it could be a worthwhile investment trap? It’s because of the way money is structured. The company’s balance sheet is burdened with debt. At half-year level, net debt rose to £1.3bn. Even if the company does well, the need to service its debt could cause Aston Martin’s stock price to drop.
Woe to the balance sheet
The automaker has plans to deal with its troubled balance sheet.
Aston Martin has today announced it has raised £576m in a rights issue. That will help reduce the debt and improve the firm’s liquidity cushion. But I doubt how much of a difference it will make. The company plans to use more than half of the new funds to reduce debt. So I expect net debt to be high in the future.
But the downside is that the rights issue will cost existing shareholders heavily, and not for the first time in many years. I have long seen Aston Martin shares as an added risk to owning and it has.
Price drop
After falling 9% on today’s news at the time of writing, Aston Martin’s share price is now down 96% from where it was listed on the stock market four years ago. Some of that decline reflects the massive stock consolidation seen during that period.
Despite that setback, I continue to shy away from adding stocks to my portfolio. The rights issue will help strengthen Aston Martin’s finances and investors Mercedes-Benz They are shopping. But they may have strategic objectives, not just financial ones like mine.
What I see is a business with a lot of debt, a history of significantly undermining shareholders, and a business with risks like bankruptcy that could hurt sales. Management has been cut and changed in recent years and I have no confidence in the investment case from a small private investor perspective. Even at this level, I see it as a potential value trap. A fall in Aston Martin’s share price will not tempt me to buy it for my portfolio.