Why I’d buy double-bagger Ashtead Group plc ahead of Versarien plc

Roland Head explains why he thinks Ashtead Group plc (LON:AHT) is a better growth buy than five-bagger Versarien plc (LON:VRS).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For growth investors, it’s easy to rule out big-cap stocks using legendary investor Jim Slater’s argument that “elephants don’t gallop”.

But from time to time, these heavyweights do pick up speed. US-focused plant hire specialist Ashtead Group (LSE: AHT) is a case in point. Shares in the firm have doubled since early 2016, earning Ashtead a place in the FTSE 100 index.

Growth remains strong. Underlying rental revenue rose by 20% to £1,774m during the six months to 31 October, lifting the group’s underlying operating profit by 21% to £591.3m. That represents an underlying operating margin of 33%, which is very good.

Chief executive Geoff Drabble says that the firm’s strong first-half performance was “supplemented by clean-up efforts” following a particularly severe US hurricane season. This has left the group on track to deliver full-year results “ahead of our prior expectations”.

Could the stock double again?

The company plans to increase its footprint in the US market by 50% by 2021. The US plant hire sector remains fairly fragmented with many smaller companies which are potentially suitable for acquisition.

Ashtead is stepping up its efforts to consolidate this market and spent £298m on bolt-on (small) acquisitions during the first half, up from £142m last year. Despite this, the firm’s ratio of net debt to EBITDA remained unchanged at 1.8 times. This is well within the group’s banking limits.

The shares look fairly priced to me on around 16 times forecast earnings. The share price may gain further support from a £500m-£1bn share buyback programme planned for the next 18 months. Personally, I’m not sure this buyback offers great value for investors, given that shares are at record highs. But if underlying earnings continue to grow, the buybacks could help to drive further gains.

In my view, the shares remain a buy for growth.

One stock I’d sell

Ashtead isn’t cheap, but its growth is based on real cash profits. That’s not something that can be said of small-cap materials engineer Versarien (LSE: VRS), whose shares have risen by a staggering 595% so far this year.

Investors in this group hope that its proprietary “Nanene few layer graphene nano-platelets” will find commercial applications in several industries. Recent research agreements announced by the firm include a “global chemical major” and Israel Aerospace Industries.

However, such deals are fairly common among high-tech firms, and don’t always lead to commercial success.

Nanene doesn’t yet appear to generate any meaningful revenue for Versarien and the group’s legacy business is quite modest. Group revenues totalled just £4.38m during the first half of the year and the company reported an overall loss of £0.77m. Reported net assets were just £5.72m.

These figures lead me to think that the company’s market cap of £117.2m is probably too high. Versarien is expected to report another loss next year, before making a modest profit of 0.6p per share in 2018/19. That implies a 2018/19 forecast P/E of 132. In my view that’s excessive for a company that has never made a profit since listing in 2013.

I believe the good news is already reflected in Versarien’s share price. If I was a shareholder, I’d definitely be selling in order to lock in this year’s outstanding profits.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Would Warren Buffett buy BP shares, as oil excitement grows?

Warren Buffett is a big investor in the oil business, and BP's performance has been attracting investor attention in results…

Read more »

Cropped shot of an affectionate young couple posing with a bunch of flowers in their kitchen on their anniversary
Investing Articles

Here’s how long-term loyalty to UK shares can lead to dazzling returns!

The most successful UK and US share investors buy shares to hold for the long term, as this report shows.

Read more »

Investing Articles

NatWest has just smashed brokers’ dividend forecasts!

After NatWest delivered a Valentine’s Day surprise to investors, our writer thinks the experts may have to raise their dividend…

Read more »

Investing Articles

The NatWest share price slips in early trading despite positive FY 2024 results. What’s the deal?

The NatWest share price is down slightly this morning after the bank released its final results for 2024. Our writer…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

My Legal & General shares have climbed just 7% — so how come I’m sitting on a 20% gain?

Harvey Jones' trading account is showing only a modest return on his Legal & General Shares, but on drilling down…

Read more »

Investing Articles

Prediction: the BP share price could rise in 2025 (or it might fall!)

Following this week’s release of the energy giant’s 2024 results, our writer reviews the prospects for the BP (LSE:BP.) share…

Read more »

many happy international football fans watching tv
Investing Articles

What’s gone wrong with the FTSE 100’s ‘King of Trainers’?

Feeling the pain of a 28% drop in the JD Sports share price over the past three months, our writer…

Read more »

Investing Articles

Is it too late for investors to consider buying these outstanding FTSE 100 shares?

Stephen Wright wonders whether now's the time to consider buying shares in the FTSE 100’s outstanding companies, despite some high…

Read more »