Fundamentally Furloughed

Really enjoying these analysis, keep them coming kind sir :smile:

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Thanks for the kind words!

I’m looking at what to write about today, I’ll have a peep for anything interesting!

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Aston Martin? Maybe you could find out why it appeared in the most bought stocks last week. It runs out of money more than I do :laughing:

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Wow, I just gave them a quick look and it looks like a nightmare! :scream:

I think their cars hold better value than the stock. This could be an exciting one to look into!

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Got another favourite please - Legal & General!

My last remaining hope for any dividends this year.

Another one for you if you have the time - a deep dive in home builders: Barratt vs Taylor Wimpy

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Aston Martin Lagonda Global - AML (Sell)

For my next analysis, I wanted to look at Aston Martin after @jamesr 's suggestion. The stock has been in a downward spiral since it became publically available back in October 2018. Let’s see who is in the driver’s seat and where they are going.

Who is Aston Martin Lagonda?

Aston Martin Lagonda is an independent luxury car group. Over 100 years of experience across two brands. One of the few British car companies left, much less publically listed.

Aston Martin, created in 1913, is named after a race when Lionel Martin took on the Aston Clinton Hill Climb in and won. They brought Lagonda in 1947. Both companies have a rich history of racing and fast luxury cars. We’ll find out if that is enough for them to survive in the modern world.


Source: Aston Martin Investor Information Strategy

AML makes its money by making luxury cars such as the DB range. They don’t have as robust an organisation as some of the manufacturers who control more of the supply line to a wider audience. Their sole focus is on producing and selling new cars, both to wholesale and retail (online and with their showrooms.)


Source: Aston Martin 2019 Full Year Results

Aston Martin has also recently (rejoined) Formula One, however, this is not a revenue opportunity, rather an exercise in brand exposure.

The Starting Line Up

Not all car manufacturers are equal, and some have a bit of a head start when it comes to their fundamentals. To keep it brief and help frame the investment, we’ll give each firm a quick MOT.

Aston Martin


Source: Genuine Impact
Horrifically poor quality, high debt, no shareholder payouts. Even with the massive share price slashes, still an expensive buy. An extremely weak outlook for future revenue and earnings.

Ferrari


Source: Genuine Impact
A good comparison as both companies are luxury brands focused on racing. High profitability but also heavily loaded with debt. Very expensive to buy shares right now. Also, an extremely weak outlook for future growth.

Volkswagen


Source: Genuine Impact
Not as profitable as their peers but paying money out to shareholders makes this more attractive. They are considered very cheap to pick up right now as well. They have a weaker outlook but still mildly better than the others here.

We also have Ford, BMW, GE, Daimler, and even Tesla. Aside from Tesla which doesn’t follow the fundamental rules, the larger companies largely follow the same pattern of Volkswagen. Currently at a discount due to COVID-19. However, Aston Martin is not considered cheap like it’s peers.

Potentially this is done to the “awareness” of Aston Martin, while it might be synonymous with James Bond they have not been mentioned where it matters. In past 62,560 rap and hip-hop songs from the 100 Greatest Rappers of All Time as well as any rapper who has appeared on the Hot 100 chart in the past decade. Mercedes (Daimler), Volkswagen, and Ferrari all dominate the top three and they have stronger fundamentals than Aston Martin, take that analysis as you will.


Source: Genius What Are The Most Popular Car Brands In Hip-Hop & Who Is Rapping About Them?

The Share Price

I mentioned the declining price since they became a public company.


Source: Guardian Aston Martin’s troubled flotation

Plagued with false starts and cash flow troubles, Aston Martin finally had some good news in 2018 when they reported their first-ever profitable year. However, the rose-coloured IPO was short-lived.

What has been causing the recent issues though? How hard hit was Aston Martin?

Aston Martin Lagonda confirms that it will be raising gross capital proceeds of £536m through an equity raise, including a private placement of shares for £171m to the Lawrence Stroll led Yew Tree Consortium (as part of their total investment of £262m) and a subsequent rights issue.
Source: Aston Martin Investor Relation Rights Issue

Show Me The Money

Why have they raised additional capital? The share price woes lead us perfectly onto the financial situation at Aston Martin. In the same announcement, AML had to share some uncomfortable news.

COVID-19 has hit them hard and stopped all production on the new SUV, delaying their entrance into the market even more. Given how much is riding on this and not letting customers cancel their pre-orders, it’s a touchy time.

It gets worse. Due to the regulation, a company is either has enough working capital for the year or it doesn’t. There is no middle ground. Aston Martin has been forced to announce they do not have enough working capital and the investment was part of a cash injection to solve these issues.

They have a few options to help provide some comfort. Additional funding facilities of approximately £150 million. The option until 8 July 2020 to draw up to $100 million of the Delayed Draw Notes issued on 8 October 2019. Discussions with the UK government concerning the potential support packages available to businesses to trade through the pandemic.

When it comes to financing you want to make sure you have the best people on the job. Mark Wilson, the Chief Financial Officer, has now stepped down. Aston Martin currently has an interim CFO. Additionally, three directors are stepping down and not seeking re-election. Meaning the company setup is no longer compliant, thus a new search for independent board members is underway along with trying to source a CFO.


Source: Aston Martin 2019 Full Year Results

After some heavy investment into a new factory, and with pre-orders for their first SUV sold out, this is the worst time for Aston Martin to deal with a lockdown.


Source: Aston Martin 2019 Full Year Results

The lack of diversification across their revenue lines, and issues with potential customer cannibalisation, are all impacting their ability to sell more cars. Compound this with the financing issues and they can’t make the new cars to sell.

In 2019 they also started a voluntary redundancy and early retirement programme actioned which resulted in a 22% reduction in year-end headcount. The main is by 2021 to save over £10m in operational costs. With an operating profit margin of 0.05%, they are not in a strong position when it comes to profit generation.

With £19m cash flow from their operations and £243m coming in from financing activities, cash flow conversion is a serious issue for them. They are currently in almost £1bn worth of debt and currently reporting a pre-tax loss.

Buy While It’s Cheap?

Sometimes buying a distressed company means you can pick it up cheap. As Mr Buffett likes to say, buy a great company at a good price.

Sadly, due to the loss-making nature, high revenue, and poor cash flow, Aston Martin is not an attractive company based on its share price ratios. Price/book of 27.28 and Enterprise value/EBITDA 28.50, these figures can die another day.

First Place Finish In The Future?

Often when I talk about distressed assets I talk about it as an opportunity for a long term investment. Taking a risk now to buy the company on the cheap to enjoy its future growth.

This is not the case with Aston Martin.


Source: Genuine Impact

With very weak future revenues, (the deposits for the new cars have already been taken and it’s assumed a large number will convert already.) Earnings in the future are also very weak, the operational issues have not been solved and the margins are too tight.

Aston Martin need to streamline the business and they recently did some expansion, plus losing key members is not helping the transition.

The sell-side analysts have a very disappointing outlook. With many showing a lower target price than Aston Martin is currently trading at.

With the Q1 2020 results expected this Wednesday, 13th May 2020, we’ll see the full scope of the damages.

Why A Sell?

If I was holding Aston Martin I would be looking for my moment to sell sooner than later. I have a very low expectation for the announcement this Wednesday, and I don’t see a recovery any time soon, if ever.

The best outlook for Aston Martin would be an acquisition. However, who would want to buy the brand while it is heavy with debt and struggling to optimise its business?

The added brand exposure from the Formula One is unlikely to move the needle and might be a bigger expense than expected. The bottom teams are paying more money than they make, and that’s likely how Aston Martin will start the session.

Let me know what you think about my write up and analysis. Any parts you would want me to focus on, or bits you want me to cover?

Stay safe and thanks for reading!

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Thanks for the write-up mate, and thanks for all the others you’ve shared with us on this thread.
I agree with your finding the stock as a sell, but i wont be selling mine anytime soon!
This is only because i bought some shares in February at £4.50 ( :open_mouth: ) and now they are at 42p! :sob: - Thankfully, i had only purchased 5 shares.
I then got another 20 shares at 30p each through the rights issue which has brought my average price per share down to £1.1443.
So even though it seems pointless holding them, i don’t see much point in selling either due to both the current price as well as the size of my investment. Will hold for now and sell if the price ever improves.
Thanks again for the analysis.

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That sounds tough, completely understand your stance though.

The biggest challenge is always when do you cut off a downward stock and do you let the winners go. Never simple when it really come down to it.

Hopefully my analysis is wrong or there is some upside like a potential buyer!

I’ve essentially written that investment off and would sell if i had a bigger holding and put the money to work elsewhere. This was one of my first purchases on Freetrade and i got sucked in by the glamour of the company, rather than fundamentals. I’ve learnt a lot since then and hopefully i will be able to avoid falling for the same trap again.

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@jcksmith850 what’s your take on Toto Wolff’s £37m investment in Aston Martin?

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That’s a great attitude and when you look at it like that it’s an acceptable learning fee. We all made mistakes when it comes to investing and some of us have certainly lost more than £25. Hopefully your next investments will be more successful! :+1:

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Great write up thanks. :+1:

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Enjoying the reviews, thanks.

To complete the quote from Mr Buffet: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

From the 1989 Berkshire Hathaway annual letter

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These are brilliant!! Would you consider doing Halfords? Think it’s an interesting one given the current climate! Their share price rose 25% just today!

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Sadly nothing to get excited about. This was before they had to aggressively raise cash and dilute share holders.

Wolff’s Aston Martin stake will be diluted to 0.95 per cent today, following a rights issue by the manufacturer as it raises capital in an effort to turn its fortunes around.

With almost a billion in debt it’s not going to move the needle. :frowning:

I like the sound of L&G, I’ve had my eye on them and Aviva as they both have some trouble but could make for an interesting buy cheap investments.

Home builders is a tough one, that really economy and COVID-19 driven, though with the lockdown being eased in England there might be some more information from these guys that I can write about. TW is a bell weather for the country so it’s pretty topical!

Didn’t even know they were listed, whoops! :persevere:

They are a real small cap so I might struggle to get good coverage on them, I’ll give it a look and see.

Thanks for the suggestions! I’ll have a look today and see what information I can find and what would make for some interesting analysis! :boom:

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Legal & General - LGEN (Buy)

Thank you, everyone, for the kind words. As per @SpyrosL’s suggestion, I’ll be having a look at Legal & General. They recently had their full-year results which mean now is the perfect time to get some updated fundamentals.

“Improving lives through inclusive capitalism”

What Does Legal & General Do?

Before we jump into the analysis, let’s cover off what L&G does to general revenue. They are the UK’s largest investment manager, and among the 15 largest in the world, with more than £1 trillion of assets across its different businesses.


Source: L&G Full 2019 Report

Even before we get into the nitty details of each business line. It’s worth pointing out this is operating profit per division, which is already very impressive looking.

Pension Risk Transfer, this is all about annuities. When you enter retirement you can buy an annuity, this product will pay you a set amount each month/year until you die. The company takes an assessment of how long they predict you’ll live for, how much your pension is currently worth, and then offer a discounted but a guaranteed regular payout for you. As long as the discounts are deep enough, or they correctly assess life expectancy, this is a highly profitable business. This business line focused on bulk annuities, where it buys a “book” of annuities and thus takes on the risk.

Investment Management is the ongoing fees associated with buying funds. L&G has an impressive suite of investment funds. Over 50 different funds ranging from actively managed, passive trackers, fixed income, property specialist, to future themes like ESG or new energy.

Capital Investment Direct is all about direct ownership of larger long term investments. With over £16.3bn invested into UK infrastructure and a planned 80,000 homes by 2020. The projects are happening across Manchester, Cardiff, and Bracknell.

Insurance is what it says on the tin. L&G insurance is both for retail and part of the reinsurance structure too. L&G will take on insurance projects of all shapes and collect the premiums, taking the risk on the negative event not happening.

Finally, we have Retirement Solutions. Unlike the pension risk transfer, this business line deals with individual annuities, not buying a book of annuities to cover. Additionally part of the retirement solutions is mortgage advances, helping retirees paying off their mortgage or remortgaging their properties to free up some cash.

What About The Financials?

L&G is a very strong fundamental company, the real challenge comes with the high expectations the market has of their future returns. The recent COVID-19 outbreaks and insurance claims have damped the share price. Let’s see what that has done for the rating.


Source: Genuine Impact L&G

Out of almost 5,600 companies, L&G has come in #121 for overall quality. This is a very impressive feat. I expect financial companies to rank well for quality due to regulatory requirements around cash on hand but it’s worth seeing the raw numbers behind this to understand what this means.

Profitability isn’t as high as you would expect. Bringing in just below £2.1bn in profit before tax you’d be surprised to know they have left a lot of cash on the table. The profit margin is 9.28%, this leaves them a lot of room to make themselves more operationally efficient and one of the areas L&G can make a real difference in terms of growth. You’d hope they convert more of the £19.7bn in revenue they collected!

It should be no surprised L&G is a cash-rich firm, they have to protect themselves from the insurance payouts, and maintain strong cash flows.


Source: Wallmine L&G

Their liabilities to assets operate around 98% coverage, while expected this does mean the £13.9bn in cash and cash-like assets is very much required.

What I am interested in is the impressive dividend that L&G has maintained. Paying a dividend out since 1993 and currently paying a yield of around 8.5%, this might be the investment for any dividend lovers out there. The dividend has increased 11.3% over the last five years and 6.3% over the last three years. This is very much part of managements objectives and the focus for the business.

Paying out the shareholders is a key metric, which depending on your view could be positive or negative.

Are They Priced At A Good Value?

As mentioned paying out to shareholders has been a key target for management. Alongside this has been the various value ratios and keeping them balanced.


Source: L&G 2019 Full Results

By most measures, Legal & General is a very cheap and underpriced buy right now. I would take these numbers with a pinch of salt as this was managements objective as part of a five-year plan, rather than the natural market valuation of the company.

For me, this signals a great time to buy in while they move into a new strategy while keeping the shareholders at heart. This will likely free up more resources to pump up the dividend or even to increase operational efficiency. Maybe creep that profit margin up.

What Do The Sell-Side Analysts Say?

This is probably the most split sell-side I’ve seen in a very long time.


Source: Genuine Impact L&G

While they have missed the analyst predictions, I suspect this is due to their bigger focus on the company’s target rather than excelling against expectations.

However, you can see there several analysts saying now is the time to exit, a few who want to wait and see, and a slightly larger number looking to buy while it’s cheap.

So why do I think this is a buy?


Source: Genuine Impact L&G

Expected return means the share price increases in value, and expected growth is the revenue and earnings. A growing dividend and growing share price (target price) are absolutely what I am looking for. Increasing their revenue and earnings to meet sell-side expectations while exciting isn’t the be-all or end-all for L&G. Bringing in almost £20bn in revenue, converting that revenue into profit rather than trying to have another explosive growth of incoming revenue isn’t my concern.


Source: Market Beat Target Price

While the target has been decreasing as the share price has fallen, we are still looking at an average target price being 20% higher than the current price.


Source: Wallmine L&G

While the price has dipped and not fully recovered, the dividend for the current year has passed, giving us a clear runway for a recovery.

There have been a few warnings with COVID-19, however this is right now a wider market issue. Being in the insurance space this would have hurt L&G more than others, but with a foot in the investment space, they have been making their own cheap investments.

An ESG Friendly Buy

L&G also score very highly when it comes to their future innovations and investments into a cleaner, fairer future. I don’t truly believe everyone at L&G thing they are a force for good. I’m not expecting their staff to dress up as Batman and beat up Shell employees. Rather L&G knows they have the money to make a difference, and they make a targetted effort to make a difference in the world of tomorrow.

Personally, the increasing dividend and tasty 12-month target share price are what is driving me towards a buy stance, but it helps you feel all fluffy inside while you are doing it.

Let me know what you think of the analysis, do you agree or have another view? Anything you would want me to cover off or think is missing?

Thanks again for reading and enjoying the write-ups!

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Thanks mate, really enjoyed that.

Personally I agree with you, I see L&G as a Buy. I think there will always be demands for their products and whilst adverse market conditions impact them from a risk perspective, they have a strong balance sheet to cope if necessary.

Tasty dividend indeed :cake:

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Great read, thanks @jcksmith850

LGEN are a long term hold for me. Their foray into pre-fab/modular housing is interesting: https://www.legalandgeneral.com/modular/

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Thanks for the feedback!

The home building aspect is very cool. I was surprised at the amount of innovation these guys are taking on. They didn’t get their high ESG rating for nothing after all!