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Aston Martin (LSE:AML)’s shares have crashed and burnt over the last few years. Laden with debt and bleeding cash, the company should be a smoking wreck in the rearview mirrors of its competitors.
Yet, it is still at the forefront of the automotive world. New models are snapped up by the rich and famous, and its F1 team looks imperious. It enjoys brand visibility and recognition like few others, being the carriage of James Bond.
Potential for investment returns from the firm lies in just how responsive the share price is to good news of any magnitude. It is almost as if revenue growth excites investors who long for it to retain its former glories. For instance, this year’s favourable earning’s report was greeted by an almost 50% share price rise. And that was when it was still losing more than £100m! However, its fluctuating price as it slumps relative to ill tidings means that high returns are by no means the only outcome of a volatile share price.
If the rise following the earnings report shows how low the benchmark to get Aston Martin punters excited, then breaking even or just treading the verge of equilibrium would arguably deliver handsome returns to those who bought shares during the firm’s slump. Assuming, of course, that commercial performance remains strong and the financials don’t take a turn for the worse.
The performance of the company’s financials is also very responsive to small commercial changes. This is fortunate for those banking on the Warwickshire-based company as the outlook is very rosy. Almost 80% of the GT and performance ranges were sold out for 2023.
Moreover, the new Valkyrie hypercar, one that delivers Formula One type performance to civilians, sold out almost instantly. With figures like David Coulthard proudly flaunting their new rides, it is a success from commercial and marketing perspectives, as well as showcasing the engineering talent and potential.
The luxury car market also appears immune to the current cost-of-living crisis and inflationary pressures. Over the last year, sales of cars for more than £100,000 have grown by 6.5%. Meanwhile, conventional car deals have fallen to levels last seen in 2012. This is encouraging for Aston Martin backers as, in the final quarter of 2022, revenues grew by 33% even as wholesale volumes shifted only 3%. Yet, commercial performance does not guarantee a linear rise in returns. It could also fall, which is very important for me to consider when assessing whether to invest in Aston Martin.
Thus, even marginal gains in profitability should positively affect the company. As demonstrated earlier, this is also quickly reflected in its share price. This suggests a roadmap by which the carmaker is rescued from its financial perils by its name and the quality of its cars.
Furthermore, a host of City analysts are confident that the company will return to profitability within the next three years. This estimation is driven by sales, but also an ability to attract large institutional investment to service debts. This should enable the commercial arm to churn out renowned cars. For instance, the Saudi Public Investment Fund backed Aston Martin to the tune of £650m, becoming the second largest stakeholder.
Overall, this is a low-barrier-to-entry share that promises long-term returns, and returns on each step it takes out of the red. That long-term promise is enough for me to weather immediate volatility and consider adding a stake in Aston Martin to my portfolio. I do so with awareness of the risk that the share price could also fall, and have adapted the exposure of my capital accordingly.
