The Aston Martin (LSE: AML) share price has been on a downward trajectory since the company’s IPO. Based on this performance, some analysts have speculated that the stock could be a value trap.
However, I don’t think this is the case. Today, I’m going to explain why.
Aston Martin share price problems
Two key red flags tend to show if a stock is a value trap. First, if it’s active in a sector that’s shrinking. The newspaper industry is a fantastic example.
This doesn’t seem to apply to the luxury car manufacturer. Demand for high-end cars has only increased over the past decade. Figures suggest the market will continue to grow at a mid-single-digit percentage for at least the next decade. So, on that basis, it doesn’t look as if Aston is active in a shrinking sector.
The second red flag to look out for is debt. A company that has a lot of debt can struggle to return to growth. Debt can act as a weight around the organisation’s neck, which restricts research and development, marketing spending, and prevents the hiring of talent.
Unfortunately, the luxury carmaker does have a significant amount of borrowing. This has proven to be a thorn in the side of the business for years.
However, unlike most other companies, Aston’s brand is worth its weight in gold. Creditors have been willing to give the business more leeway due to its reputation. What’s more, the company has had no trouble finding new backers willing to lend it more money.
As such, while the firm does have a lot of borrowing, I don’t think it makes the Aston Martin share price a value trap. The strength of the company’s brand could be considered to be its most substantial advantage. Some estimates place the value of its brand alone at more than £2bn.
Considering all of the above, Aston could be an attractive addition to a diversified portfolio at current levels. The stock doesn’t appear to be a value trap, and the company’s brand value is worth significantly more than its current market capitalisation.
That said, it could be some time before the business does report a positive net income. The group has struggled to get new products to market in recent years, and that has weighed on the Aston Martin share price.
Nevertheless, it has some highly anticipated vehicle releases coming out over the next 12-24 months. I think these should help the business grow its top line and achieve a positive return on investment if all goes to plan.
Additional income may also help improve investor sentiment towards the Aston Martin share price, of course. In this optimistic scenario, investors may see a robust initial return on investment.
The post Is it right that the Aston Martin share price is really a value trap? appeared first on The Motley Fool UK.
Rupert Hargreaves 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.
Motley Fool UK 2020