Peter Lynch is one of my investment heroes (if I may be allowed such a thing). The US growth investor had a mantra that he followed religiously throughout his career: “buy what he knows.”
He only bought shares for his fund in companies he knew well. He wanted to know what they were selling, how they were selling it, where the customers were, and what the employees thought about the management. And most importantly, he needed to like the product.
I try to follow these principles myself. I will only invest in companies if I like what they sell. If I don’t understand the product, I’m pretty sure I won’t understand the business.
Aston Martin makes some of the most beautiful sports cars on the market. While it may not have the pedigree of Ferrari or Lamborghini, its place in popular culture gives the brand an illustrious standing.
However, while I love Aston products and would love to own one of their cars if I had the money, I wouldn’t touch the stock with a pole.
Aston Martin has been struggling to survive since the beginning. The company was founded in 1913 and was unable to begin commercial production due to the outbreak of World War I.
The founders finally got back to work in 1920 after an injection of cash (the first of many). Four years later, the young company went bankrupt and was bought out, only to start struggling again a year later.
These early years pretty much set the tone for the rest of the automaker’s life. The company has failed seven times since its founding and has been close to its eighth insolvency in the last two years.
Current Aston Martin chairman Lawrence Stroll burst onto the scene in 2020, leading an investment consortium with the aim of putting the company’s troubles behind them once and for all. Stroll has experience switching luxury brands and has made a fortune in the process.
A key part of Stroll’s plan was a £1bn refinancing in October 2020. The financing was designed to end the company’s financial problems and provide the cash to go ahead with the restructuring.
However, while Aston was able to raise the cash, it had to pay a heavy price. More than 10%, in fact, at a time when some blue-chip European companies were issuing debt at negative interest rates.
Fundraising saved the business, but at a huge cost. And now, the company is back for more.
Aston is raising £653m from several major backers, including Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF). PIF is acquiring a 16.7% stake through a £78m placement, while other shareholders, including major shareholder Mercedes-Benz, and Stroll’s Yew Tree consortium are acquiring preemptive rights.
These investors are putting up £335m with other investors on the hook for £318m via a fully subscribed rights issue.
Stroll told the Financial Times that raising money was important for the company to “deal with fucking debt”. He has a point. The debt stood at £957m at the end of March and the group pays more than £100m a year in interest costs. To put these figures into perspective, the company’s market capitalization is just £450m.
Valued at £4.3bn at the time of its IPO in October 2018, the carmaker has been a terrible investment for the last four years. Fortunately for its long-suffering investors, there seems to be no shortage of wealthy backers willing to keep the business afloat.
Aston has also received a £1.3bn investment proposal from China’s Geely and former owner Investindustrial, the Italian investment group. Aston rejected this offer as too low.
Will this be the last time Aston has to turn to investors for more cash? I think it’s unlikely. The company aims to start producing cash by 2024, but that has already been pushed back a year. Sales in the first half were lower than expected with the group selling just 2,676 vehicles, although it is still targeting 6,600 this year.
Aston’s problems run much deeper than his bottom line. He has had problems with overproduction, which left dealers with too much inventory. There has also been a lot of management turnover: In early May he named his third CEO in three years. And new releases have been plagued by delays and cost overruns.
To give Stroll credit, he has started to steer the ship in the right direction. The automaker only produces cars it has already sold, and has outsourced engine manufacturing (Mercades, which owns 20% of the company, makes most of it). That helped deal with some of the reliability issues Astons are known for.
Still, none of this will matter until the corporation can fend for itself. Without cash coming in, you will continue to rely on the kindness of strangers. That’s why I’m not a buyer. I may love what the company produces, but that doesn’t mean I should own the stock.
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