FTSE 100 firm Ashtead Group‘s (LSE:AHT) a worldwide chief in rental tools, working within the UK, US and Canada. Between March 2020 and November 2021, the share value rose from £14.57 to £64.50 – a 342% leap. This was largely pushed by excessive gross sales at its US rental enterprise, Sunbelt. It additionally made 27 acquisitions all year long.
However issues have been extra subdued currently, with the value up solely 17% previously 12 months. Monetary efficiency stays sturdy nonetheless, pushed by constant demand for its rental tools throughout numerous finish markets. In 2023, it reported a considerable improve in income and earnings, demonstrating its resilience and talent to capitalise on beneficial market circumstances.
Rising demand
Final month, the US Federal Reserve minimize rates of interest for the primary time in over 4 years. This could take some stress off companies and is predicted to ignite a development growth. Because of this main dealer Berenberg put in a Purchase score on the inventory final month. It believes the rising demand for knowledge centres and semiconductor factories may benefit Ashtead’s US enterprise.
Earnings per share (EPS) slumped from $3.81 to $3.55 over the previous 12 months, however analysts consider the worst is now over. Within the subsequent three years, EPS is predicted to rise to $5, or extra. The corporate’s future return on fairness (ROE) is forecast to be 22.9% in three years — virtually double the business common.
However there’s some concern. With a debt load now exceeding $8bn, Ashtead wants an earnings enhance. Though that quantity has lowered barely this 12 months, its debt-to-equity ratio continues to be above 100%, placing it in a precarious place.
Not for the faint-hearted
Taking a look at historic value motion, it appears the rental tools business could also be delicate to financial fluctuations. As such, a major financial downturn might result in lowered demand for rental tools, impacting Ashtead’s income and profitability. Maintaining that in thoughts, Ashtead’s very a lot a development inventory — not the kind of sluggish and secure earnings inventory traders may select for a passive earnings portfolio.
It additionally faces the specter of competitors from different rental tools firms, each domestically and internationally. Market chief or not, a rising competitor might stress margins and restrict pricing energy. Because it offers rental tools on credit score, the shortcoming to fulfill fee obligations might lead to monetary losses.
A worthwhile consideration
Total, I believe Ashtead Group has the potential to do very effectively within the coming years. It seems to be a well-managed enterprise with strong financials and a sexy valuation. Nevertheless, its success is closely reliant on the US financial system which is exhibiting early indicators of restoration.
If that holds out, it might drive important development for the agency. If not, it might be in for some volatility. I’d contemplate it a medium-risk possibility that might handsomely reward courageous traders. For now, I’ll regulate the inventory and contemplate shopping for if it continues to scale back its debt load constantly and sustainably.
