Today I am outlining why Ashtead Group (LSE: AHT) could be considered a terrific stock for growth hunters.
Building boom boosts earnings picture
Construction and industrial equipment rentals specialist Ashtead is in prime place to benefit from accelerating momentum in its key building markets, in my opinion, a point underlined in last week’s interims.
The company saw underlying rental revenues gallop 22% higher during May-July to £417.7m, a result that prompted the firm to bolster its full-year profit guidance. Pre-tax profit leapt to a record first-quarter result of £120.4m during the period, up 33% year-on-year.
And Ashtead expects activity in these areas to keep turnover ticking higher during the medium term at least. The company expects total building starts across all sectors to advance 18% in 2014 and 21% in 2015, figures which are expected to push industry rental revenues 8% and 10% higher for these years.
And latest data from both sides of the Pond certainly suggests to back this up. In the US, from where it generates the lion’s share of total profits, construction spend rose 1.8% in July, the largest on-month rise since June 2010. And in the UK the purchasing managers’ index (PMI) hit a seven-month peak in July at 64.
On top of this, Ashtead has also been extremely successful in grabbing market share from its rivals, particularly through its Sunbelt and A-Plant divisions. And the firm is also prepared to splash the cash to supplement its already-impressive organic growth, and its robust balance sheet supported £32m worth of acquisitions in the past quarter alone.
Solid growth poised to continue
After posting a 98% earnings decline in the wake of the 2008/2009 financial crash, Ashtead has seen earnings surge in recent years and the business carries a compound annual growth rate of 126.7% since 2011.
Expansion has normalised more recently, as expected, but City analysts anticipate further impressive growth of 20% for both of the years ending April 2015 and 2016.
At first glance these projections may come across as excellent value, with a P/E multiple of 18.3 for this year registering outside the yardstick of 15 or below which represents reasonable value for money. This does edge down to 15.3 for fiscal 2016, however.
But in my opinion investors should take note of the firm’s lowly price to earnings to growth (PEG) readouts for these years, figures that highlight Ashtead’s terrific value relative to its. These come in at 0.9 and 0.8 for 2015 and 2016 correspondingly, under the bargain benchmark of 1. I believe that Ashtead is a brilliant growth pick that is too good to pass up at current prices.
