Most investors wouldn’t have thought twice about buying shares in equipment rental group Ashtead (LSE: AHT) 10 years ago, just as the world was entering what turned out to be one of the worst economic crises in history.
But unlike so many of its peers, which collapsed as the global housing and construction market crumbled, Ashtead powered through.
The returns since have been higher than anyone could have expected. Over the past decade, shares in Ashtead have produced a staggering total return of 45.2% per annum, turning every £1,000 invested into £41,654.
Bucking the trend
Management has steered the business carefully over the past decade, making select acquisitions to boost growth and being careful not to overstretch the group.
Net debt has nearly tripled over the past five years, but shareholder equity has expanded faster, suggesting management is using debt carefully to fund value-creating acquisitions. Management has also prove that it is skilled at integrating acquisitions successfully. The group’s operating margin has increased by around 25% over the past five years as Ashtead’s increasing size has resulted in economies of scale.
It doesn’t look as if the business is going to slow down any time soon. At the beginning of September, the company announced a 22% increase in revenues for the quarter to the end of July, thanks to a jump in demand for equipment rental in the US. Profit before tax jumped to 23%.
This kind of growth is unlikely to last forever as Ashtead’s fortunes are tied directly to economic growth. However, in the past decade, the firm has shown the market that it can ride out all economic environments, and for this reason, I think it still has plenty of potential. Indeed, another downturn could actually be good news for it, as it will allow Ashtead to swoop on smaller, struggling competitors, and buy up growth at a knockdown price. And talking of knockdown prices, today the shares are changing hands for just 11.4 times forward earnings, to me that looks like a steal.
Tech small-cap
At the other end of the growth spectrum, there’s Zoo Digital (LSE: ZOO). Unlike Ashtead, this company does not have a long track record of growth behind it, but I think it has a long runway for growth in front of it.
Zoo provides digital services for the global entertainment industry. As it is still in its early stages, it is not yet profitable, but it is getting there. In a trading update for the six months to the end of September, published today, the company revealed adjusted earnings before interest tax depreciation and amortisation (EBITDA) of $0.5m and a gross profit of $4.9m. For the full year, City analysts have pencilled in a net profit of $1.6m, and earnings per share (EPS) of $0.02. EPS year-on-year growth of 51% is expected for 2020.
These numbers are impressive and hint at what the firm is capable of. The next few years will be fundamentally important for business. If it can maintain profitability, there should be a re-rating of the stock, as investors view the company through a different lens.
That being said, as Zoo is still in its growth phase, it is a riskier buy than Ashtead. However, considering the company’s potential, I think the risk could be worth the reward over the long term.
