The Aston Martin share price is tanking. I’d buy this FTSE 100 stock instead

Aston Martin could be heading for a costly breakdown, thinks Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Sports car maker Aston Martin Lagonda (LSE: AML) is a great luxury brand, but the firm’s finances look like a car crash to me.

City investors seem to agree. Since the firm floated on the London Stock Exchange last year, heavy selling has caused the share price to fall by nearly 70%.

The group’s problems are simple enough. It’s not selling as many cars as expected, debt is rising and cash generation is poor. Today’s news confirms how desperate the company’s situation is, in my opinion.

What’s happened? Aston Martin has raised $150m of new debt at an annual interest rate of 12%. It’s due for repayment in 2022, adding to approximately £750m of existing debt that’s also due to be repaid in 2022.

Why I think this is bad news: The firm’s borrowing costs are rising fast. In 2017 it was borrowing money at about 6%. Now it’s paying 12%. This suggests to me that lenders are getting worried about the company’s ability to service and repay its debt.

Debt is too high: In my opinion, the firm’s last-reported net debt of £732m was already too high. Adding to this pile looks risky to me, but my understanding from today’s announcement is that the new loans were needed to free up cash for day-to-day operations.

When a company uses long-term debt to meet short-term financing needs, I see that as a warning that its financial position is probably very weak.

Will Aston Martin go bust again? Management hopes that spending on new models such as the upcoming DBX SUV will generate strong sales growth and a big boost in profits. But earlier this year, the company reported “difficult market conditions” and an operating loss of £35m for the six months to 30 June.

Aston Martin has already gone bust seven times in its 106-year history. If sales remain subdued, I think the company could run into trouble again.

If that happens, the share price could have a lot further to fall. In my view, Aston Martin is a risky and speculative stock that’s best avoided.

The stock I’d buy instead

If you want to benefit from the growing wealth of middle class consumers around the world, I think that FTSE 100 cruise ship operator Carnival (LSE: CCL) could be a much better choice.

The Carnival share price is down by about 30% from a high of more than £50 two years ago, but in this case I think the sell-off has created potential value for dividend growth investors.

Carnival’s brands include Princess, P&O, Cunard and Holland America. It’s the largest cruise operator globally and carries passengers from all over the world, including the fast-growing Asian market.

Net sales rose by 5.2% to $3.8bn during the first half of the year, excluding the impact of exchange rates. Although the firm has been forced to cut profit guidance for the year due to a number of one-off factors, cash flow remains strong.

Trading on 10 times forecast earnings with a dividend yield of 4.4%, I think Carnival stock is starting to offer good value. I’ve added the shares to my watch list as a possible buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Carnival. 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.

More on Investing Articles

Investing Articles

7%+ dividend yields! Here are 2 of the best UK shares to consider buying in June

This Fool has been searching for UK shares with the best dividend yields. Here are two he thinks investors should…

Read more »

Investing Articles

5 FTSE 100 shares to consider buying for passive income right now

The FTSE 100 is having its best start to the year for ages, and that's pushing the top dividend yields…

Read more »

Investing Articles

One overlooked cheap share to tap into the year’s hottest theme?

This Fool describes the key things to think about when investing in copper stocks and analyses one cheap share to…

Read more »

Investing Articles

A cheap FTSE 100 stock that’s ready for a dividend hike in 2024

This banking giant is one of the FTSE 100's greatest dividend stocks. And at current prices, our writer Royston Wild…

Read more »

Growth Shares

Is the BP share price set to soar after Michael Burry invests in the firm?

Jon Smith takes note of a recent purchase from the famous investor behind The Big Short and explains his view…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

I’d focus on Kingfisher now after the Q1 report leaves the share price unmoved

With the share price near 262p, is the FTSE 100’s Kingfisher a decent investment now for dividends and business recovery?

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

£500 buys me 493 shares in this 7.4% yielding dividend stock!

The renewable energy sector remains out of favour. As a result, there are some high-yielders around, including this dividend stock.

Read more »

Road trip. Father and son travelling together by car
Investing Articles

If I’d put £10k into Tesla stock 2 years ago, here’s what I’d have now

Tesla stock has fallen in the past few years. But the valuation looks temptingly low now, as we approach a…

Read more »