The Ashtead (LSE: AHT) share price was lower today, 5 September, after the rental equipment provider released its Q1 report. As I write, it had slipped 5% to 5,184p as investors continued to digest the update.
This left the stock among the top daily losers on the FTSE 100. Yet even after this drop, Ashtead remains the best-performing stock on the blue-chip index over the last five years.
So, does this dip present an opportunity to invest? Let’s take a look.
Strong overall growth
The first thing to note is that Ashtead delivered another record quarter, with revenue up 19% year on year to $2.7bn. Its adjusted pre-tax profit increased 11% to $615m. Both figures are at constant currency. Meanwhile, adjusted earnings per share increased 14% to $1.07.
In the quarter, the firm invested $1.1bn in capital across existing locations and greenfields. It also spent $361m on nine bolt-on acquisitions, adding a combined 40 locations in North America. This is part of its ongoing strategy to consolidate the fragmented equipment rental market across the pond.
One area of weakness in North America was in its film and TV operation, which was severely impacted by the Hollywood writers and actors’ strikes. This side of the business rents out cameras, rigging and specialist filming equipment to movie studios. Obviously, with the strikes ongoing, there is little demand for such stuff.
Despite this, the overall report looks encouraging to me. So why have the shares been sold off? Well, things in the UK haven’t been so rosy.
UK weakness
In the report, Ashtead highlighted weakness in its UK market. Consequently, it lowered its full-year UK rental revenue growth guidance to 6%-9% growth, down from its previous outlook range of 10%-13%.
This softening market is due to intense inflationary pressures, which have hit Ashtead’s cost base and knocked its margins. Indeed, its UK operating profit plummeted 39% to £16m.
While that is disappointing, the company now generates over 90% of its revenues and operating profits in North America.
Hence CEO Brendan Horgan doesn’t seem too concerned: “Despite the UK market conditions softening, we expect overall performance to be in line with our expectations and the Board looks to the future with confidence“.
Cyclicality
The market’s kneejerk reaction to this report highlights the risks involved when investing in Ashtead stock.
Most of its business is tied to the economic cycle, particularly in the US, meaning the stock can get punished quite badly if there’s any hint of an economic slump on the horizon.
That said, I think it’s important to remember that periods of economic expansion last longer than contractions. Therefore, Ashtead, as a rental giant in construction and industrial equipment, will generally spend more time benefiting from economic growth than not.
Would I buy the dip?
As the second largest company of its kind operating in the US, Ashtead is perfectly positioned to benefit from the increasing number of construction mega-projects there. These include data centres, semiconductor and electric vehicle battery plants, and infrastructure upgrades.
For me then, the investment story here is still very much intact.
Plus, with a forward-looking P/E multiple of 15, the stock doesn’t appear overvalued. So I’d be inclined to buy the dip if I didn’t already have a large holding.
