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Ashtead: taking advantage of shabby peers

By Chris Bailey of Financial Orbit | Saturday 23 April 2016

Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

What characteristics do you like to see in an equity?  How about revenue and profit growth, free cash flow generation, relatively modest debt levels, an experienced and sensible management team, taking market share against peers and a good capability this could continue over the next few years?  And how about for the icing on the cake: a low valuation and increasing dividend capability?

Unsurprisingly there are relatively few equities which fulfil such multiple criteria at the moment but one which ticks most of these boxes is Ashtead (AHT).

Ashtead is one of those companies that can fly a bit behind the radar.  Here in the UK you may have seen the company’s A-Plant locations where you can hire a wide range of tools, plant and access machinery but this exposure is dwarfed by the company’s Sunbelt Rentals business in the US. 

Now we all know that the US economy scrabbled out of the great recession of 2008-9 with a bit of extra coherence than anywhere in Europe so maybe no surprise that a business which is much more focused States-side has performed well.  So here is where it gets interesting: the company’s peers have not performed. 

A range of Share Prophets contributors – including myself – have stuck the boot into HSS Hire (HSS) which has had a calamitous time since floating on the market.  Similarly Speedy Hire (SDY) has grasped corporate defeat all too readily over the last year.  By contrast Ashtead’s A-Plant business has quietly got on with the job, taking share and making profits.

It is the same in the US where the most cited peer is United Rentals a group which has continually nibbled back its forecast – including at the time of their quarterly update earlier in the week.  Meanwhile what were Ashtead saying?  Yesterday’s regulatory statement ahead of a fuller update on 14 June noted:

‘The Group has continued to perform well in the fourth quarter of the current financial year and we expect full year results to be towards the top of the range of current analyst expectations’

That contrast again.

A few of you are probably wondering now why the shares are down 25% over the last year.  Today’s valuation of a barely double digit PE ratio and mid-single digit EV/ebit ratio looks light so the obvious conclusion is that prospectively prospects are worsening – after all economic growth is hardly rampant either side of the Atlantic.  But maybe in shabby times people hire rather than buy. 

And then there is market share.  In a business with too many mom and pop operators the capability to take market share is clear.  What a company needs is an ability to fund a network expansion and the aforementioned HSS Hire, Speedy Hire and United Rentals all have one aspect in common: a lack of recent performance means they are navel-gazing hoping to raise prices at their existing operations first in order to generate cash to stabilise their businesses.  Ashtead have got a couple of years of easy competition against these names.

Putting it all together I think you are rewarded over the next year if you can buy Ashtead shares with an ‘8’ in front of them. 

Chris Bailey is the editor of Financial Orbit  Next week Chris will be chairing the value investing session at UK Investor with Nigel Wray, Tom Winnifrith & Paul Jourdan of Amati - book seats HERE

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  1. alcira16247


    I strongly agree with your analysis – Ashtead (ASH), is a class company.

    Brokers consensus estimate for the year of Net Profits 403.7m EPS 80.1p and Dividend 18.6p are probably on the conservative side considering the recent communications from the company.

    Forecasted growth for 2017 also provides investors comfort, with Net Profits 451.9 m EPS 88.7p and another nice hike in the divvy to 20.7p – What’s not to like?

    Maintaining health operating margins in excess of 26%, an impressive earnings record plus a progressive dividend policy, Ashtead is well run company with strong financial controls and management that actually deserve their money!

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