Ashtead (LSE: AHT) shares dipped this week amid a profit warning in its trading update released earlier in the week. The firm has been on my radar for some time, so is now an opportunity to buy cheaper shares?
A bump in the road for Ashtead shares?
Ashtead has soared from a humble penny stock to a FTSE 100 giant. The shares have risen close to 150% over a five-year period.
As I write, Ashtead shares are trading for 4,736p. Earlier in the week they were trading for 5,244p, which is a 10% drop prior to the update. Over a 12-month period, they’re down 6% from 5,068p to current levels. I’m not worried about the recent drop. I see it as a blip, rather than the beginning of a bigger issue.
Profit warning, outlook ahead, and investment viability
Ashtead’s update began by confirming it will report record half-year results as rental revenue grew by 13%. EBITDA grew by 15% and profit before tax grew by 5% respectively.
The good news seemed to end there, though. The firm stated events in its biggest market, the US, had led it to lowering guidance for the full year. Expected rental revenue growth will come in at 11%-13%, rather than the 13%-16% previously forecast. As a result, EBITDA will come in 2%-3% lower than expected. In turn, pre-tax profit will be lower due to a depreciation charge and a net interest cost of close to $540m.
So what does this mean for Ashtead’s investment viability? I’m interested in its current valuation to start. Trading on a price-to-earnings ratio of 15, the shares look decent value for money. The FTSE 100 average is 14. Plus, Ashtead has an impressive record of growing performance year on year so this one-off warning could just be a speedbump.
A dividend yield of 1.7% is not the highest but Ashtead has a consistent track record of payouts covered by earnings. However, it’s worth remembering that dividends are never guaranteed.
Finally, Ashtead’s position in the US market could be key for the it to continue its impressive upward trajectory. Infrastructure spending is only set to increase across the pond, especially when you take into account the Infrastructure Bill and Inflation Reduction Act. The construction equipment rental arm of the business accounts for 40% of its earnings, so there could be some potentially fruitful times ahead.
Risks and my verdict
One obvious risk for Ashtead shares is continued volatility. This is because construction spending and infrastructure projects can often be put on the back burner. I’ll be keeping an eye on upcoming updates and performance here.
Furthermore, the events that have hurt Ashtead in recent months could rear their heads once more. For example, the firm rents equipment to Hollywood studios. Due to a writers’ strike, many productions halted and demand for equipment dwindled recently.
Overall, I reckon Ashtead shares falling have definitely provided a buying opportunity for me. I’ll be looking to add some shares to my holdings as soon as I have some investable cash. A cheaper valuation, passive income opportunity, past performance, and growth prospects helped me make my decision.
