In the past year, construction stock Ashtead (LSE: AHT) has performed far better than most of its FTSE 100 peers. And it continues to race ahead as well. Its share price has risen far quicker than the index, which has remained virtually unchanged. In today’s trading alone, it is up 6% from yesterday.
Strong results for Ashtead
The latest increase follows a strong set of results for the first quarter of its current financial year, ending 31 July. Its revenues are up by 21% year-on-year and earnings per share have risen by a huge 71%. Trading conditions are vastly improved this year compared to the pandemic ridden 2020.
Significantly, Ashtead’s debt ratio has improved quite a bit too. Its net debt to EBITDA, which is an acronym for earnings before interest, taxes, depreciation, and amortisation, is down to 1.3 times from 1.8 times in 2020. This is because of both a reduction in debt amount and an increase in EBITDA. A healthy debt ratio is beneficial at any time, but to me is particularly desirable during uncertain economic times like these.
Positive outlook for the FTSE 100 stock
Ashtead is also positive on the rest of the year. It has raised its guidance for revenue growth from 6%-9% earlier to 13%-16% now. This is largely because of an improved outlook for the US market, which accounted for 87% of its revenue in the latest quarter. A considerable expected increase in infrastructure spending in the US also supports this outlook.
Pricey or not?
It is little wonder then that the construction equipment rental company’s share price continues to rise, even though it has already risen quite a bit. Over the past year, it has more than doubled. But the Ashtead share price increase is not a recent phenomenon. It has been a rewarding one to hold for long-term investors too. Over the past five years, on average, it has risen by 80% each year. Much of this growth has come in the last year. But even between 2016 and early 2020, which is before the market crash, its share price had doubled.
However, the stock does look pricey, with a price-to-earnings (P/E) ratio ranging between 35 to 40 times, depends on which data source I consider. While it can be argued that the stock is priced higher because of better prospects than a number of other FTSE 100 stocks, it does not compare too well with its construction peer CRH either. CRH has a P/E of 27 times. But then, there is a likelihood that CRH is trading at a lower multiple because of a relatively small exposure to the US market. Only around 50% of CRH’s revenues come from there. This may explain why its share price increase has also been slower than that for Ashtead.
What I’d do
All in all, I think at least for the next few years, it looks like a good buy for me, and has looked like one for a long time now. I would invest £1,000 in it on a dip, which would buy me 15-20 of its shares.
Manika Premsingh 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.