There aren’t many FTSE 100 stocks I’m more bullish on than Ashtead (LSE: AHT). In fact, I think the equipment rental giant has the best long-term growth prospects around.
It’s interesting to note the share price has dropped 10.7% so far in March, and is now down 21.3% since late 2021.
Here, I’ll explain why I reckon this dip presents a buying opportunity for patient Fools like me.
Equipment for almost anything
Trading under the name Sunbelt Rentals, Ashtead is the UK’s largest plant hire firm. And despite its origins in the Surrey village of Ashtead 77 years ago, it’s now the second largest operator in the US behind United Rentals.
As the company puts it, “our equipment can be used to lift, power, generate, move, dig, compact, drill, support, scrub, pump, direct, heat and ventilate – whatever is required“.
Much of its kit is distinctively bright green and yellow. So it’s hard not to spot it on construction sites, though admittedly I may be scanning these landscapes more than most as a shareholder.
Ashtead also provided the many miles of traffic cones and barriers that we snake our way through on trips, to Covid testing centres during the pandemic.
However, the company’s real opportunity lies in the US rental market, which is seven times larger than the UK’s. This now provides the lion’s share of revenue and also has far superior profit margins.
| Operating profit margin (last 12 months) | |
| US | 29% |
| Canada | 15.8% |
| UK | 7.4% |
| Group | 26.1% |
Hurricanes and Hollywood
So why has the stock been under pressure lately? Well, the third quarter (ended 31 January) was a bit quieter than expected due to fewer floods, wildfires and hurricanes. This, in turn, led to reduced demand for rented equipment used to clear up the aftermath.
Also, its film and TV business had been impacted by the Hollywood actors’ and writers’ strikes. These resulted in significantly less demand for its cameras, rigging and lighting equipment.
As a result, it now sees full-year growth at the lower end of its 11-13% guidance range (around $10.7bn).
Now call me a pessimist, but I reckon the extreme weather will make a return while the strikes are now settled. So I’m focusing instead on the $2trn of government construction spend now underway in the US.
A building bonanza
These mega-projects (defined as more than $400m) include semiconductor and electric vehicle plants, data centres and renewable energy infrastructure. They will obviously involve lots of tools and machinery, which Ashtead’s happy to supply.
Indeed, the company expects to double its market share from this building bonanza.
Still, there is risk. The company’s financing costs have been creeping up. This is worth bearing in mind, as is cyclicality in its core construction business, which can cause share price volatility during economic downturns.
That said, the company has been diversifying its operation. For example, it has a fast-growing business renting out commercial floor-cleaning machines. Then there’s its range of golf course maintenance equipment, as well as cabins and toilets for concerts and sporting events.
In total, these non-construction end markets now make up just over half of group revenue.
With the stock trading at a fair 16 times forward earnings, I’m looking to buy the dip here.
