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Ashtead – good...but I feel I can do better

By Chris Bailey | Tuesday 11 December 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

A year ago I was a little early in saying it was time to sell/take profits in Ashtead (AHT) at the twenty quid level...but I can live with this given the good and nicely profitable bump in the share beforehand. Now the share price is just under the seventeen quid level and this has piqued my interest again because the rental of industrial goods is a growth business and Ashtead has a very decent market position in both the UK and especially the US.

The tone of today's first half numbers was solid with the company noting an 'organic growth story reflected in 15% growth in fleet' aiding near 20% profit growth in the US (although low single digit growth in the UK - albeit the US is the dominant geography for the business), a further intensification of its network reach in the US with 80 locations added (aided by just under £400 million of "bolt-on" M&A activity) and an 18% rise in the interim dividend. Meanwhile the 'outlook remains positive and trading is strong. We expect full year results ahead of our prior expectations'.

Well that all sounds quite workable and even though the company is doing some deals, the balance sheet is not deteriorating with yet another period of a x1.8 net debt to ebitda ratio. I think we can guess they are quite happy with such a structure to the balance sheet – and at least they have learnt from previous embarrassments much earlier in this century. A £500 million new buyback commitment (6%+ of the market cap) over the next couple of years does reflect some faith along with the dividend hike (which has taken the yield to over 3%).

Clearly Ashtead is a play on the industrial cycle even taking into account some of the structural pro-rental comments and its seeming good ability to build market share. From its perspective 'markets remain strong across all sectors', citing rental revenue trends, construction starts and backlog indicators. So all sounds pretty good especially as the company is trading on a single digit EV/ebit rating.

The only fly in the ointment is a little bit of corporate change with the long-serving CEO announcing his retirement/exit recently. Certainly he is going out on a high - despite recent share price volatility - but it begs the question...and what now/next? I do like Ashtead as a business but to get really excited here you have to be really excited about the US industrial cycle. Some world trade angst suppression and not too many US Federal Reserve rate rises will probably allow the stock to ghost back up to that 20 quid level again.

In short I think it is a little cheap but - to be honest - I can find other names (which I have written up in recent weeks/months on this website) I am more excited about looking into 2019 all things considered. Also not long to wait now for my new tips of the year...

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