The cars of Aston Martin (LSE: AML) have a better track record at acceleration than the company’s shares. The Aston Martin share price is just 4% higher than a year ago, at the time of writing this article earlier today. Over the longer term, the shares continue to lag far below the price at which they floated a little over three years ago.
But a couple of recent bits of news have made me consider again whether I ought to add the luxury carmaker to my portfolio. Here are my thoughts.
Positive business results momentum
Aston Martin released its interim results this month. While the picture was mixed, there was enough good news in the update to bolster the bull case. For the year to date, both wholesale sales volumes and revenue increased by 173% compared to the same period a year ago.
I think that sizeable increase matters because the directors have been building the Aston Martin investment case around plans to scale up production and manage costs carefully. If it works, that should boost revenues and profit margins. Strongly increased revenues suggest that the strategy may be starting to bear fruit.
However, one risk with Aston Martin remains its indebtedness. That fell slightly compared to the prior year period, but still came in at a hefty £809m. The need to service the debt continues to weigh on Aston Martin’s profitability. I expect that to be the case for the foreseeable future.
Director buying
Another piece of news which caught my eye was a couple of share purchases by directors. This month, two independent directors made share purchases. One of those was for £1.7m, so I regard it as substantial.
Often, directors buying shares is seen as a vote of confidence in the company’s prospects. With their understanding of the business, focus on its performance, and business acumen, choosing to put their own money into a company can be a sign they think the share price is undervalued. That could be the case at Aston Martin — but it might not be. Directors can misjudge a company’s prospects, just like other investors.
So while I note the director purchases, on their own they aren’t enough to make me decide to initiate a position in Aston Martin.
My next move on the Aston Martin share price
I think the company’s strategy is starting to bear fruit. The launch of its first sports utility vehicle, the DBX, was an important element of Aston Martin’s plan to grow. It has been fairly successful so far, bolstering the company’s prospects of a successful business turnaround.
But risks remain for the Aston Martin share price. As electric vehicles grow their market share, the company may need to keep investing heavily in research and development to optimise its offering for a new motoring age. That could eat into profits. The company’s debt load remains high. Previously it boosted liquidity with a highly dilutive rights issue, which also puts me off investing in Aston Martin as a similar move in future could also be dilutive. For now, I will watch the Aston Martin share price from the sidelines but won’t be investing.
Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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