The US economy has been powering ahead for the last decade but now there are signs of slippage, as the trade war with China drags on.
This is a particular problem for UK companies with hefty exposure to the States, notably FTSE 100 equipment rental specialist Ashtead Group (LSE: AHT), which generates an astonishing 90% of its earnings from across the Atlantic, via its Sunbelt subsidiary.
Atlantic crossing
It’s been doing very well out of the US, with its share price rising 125% over the last five years, against average growth across the FTSE 100 of less than 7%.
The Ashtead share price has enjoyed a strong 2019 too, rising 16% in the last three months despite growing fears of a market slowdown, making it one of the buys of the summer. It relies on strong US industrial and construction activity, and that worries investors amid signs of a slowdown on that front.
It shrugged off these worries to report an impressive 17% rise in first-quarter underlying revenue to £1.3bn, while profit before tax climbed 8% to £304.7m.
This reflects strong profit growth in the US, a more moderate improvement in Canada as it invests in the business, and “a slight drag from weakness in the UK.”
Harsh judgement
The shares are down 2.62% at time of writing, as UK margins weakened and profit growth slowed. The verdict seems harsh as, otherwise, these are a positive set of results. But the prospect of a US slowdown has made investors wary of anything aside from flat-out growth.
There’s another worry. Ashtead’s net debt has climbed above £5bn, as it spends money on acquisitions, invests in the business, and rewards shareholders. However, management says it’s maintaining leverage within its target range of 1.9 to 2.4 times net debt to EBITDA, and remains “focused on responsible growth.”
So far, this hasn’t been a problem, because the US economy and Ashtead have both been growing. But it could weigh on the company if we see a sustained downturn.
Well-equipped
The £10bn group’s increasing scale and strong margins are generating good earnings growth and significant free cash flow, helping to fund £125m of buy backs in the quarter, with at least £500m planned across 2019/20.
Ashtead has been an unsung FTSE 100 hero but future growth may be less impressive if the US does run into trouble. Over the last five years, earnings per share have grown by double digits, ranging from 22% to 37%, but this year City analysts forecast a slowdown to 18%, followed by 11% next year.
That is hardly disastrous and the concern has been priced in, with the stock trading at 11.2 times forward earnings, and a PEG of just 0.6. The forecast yield is low at 1.9%, albeit massively covered 4.7 times by earnings. However, management has been progressive, hiking every year since 2005.
I can see why investors may be wary, as the share price has surged while lead indicators for manufacturing activity slowed. I still think today’s market response has been overly negative, and the way Ashtead is investing in its business suggests it still sees a bright future. Although you may prefer this rapid fire growth stock instead.
