The FTSE 100 is home to Britain’s biggest businesses. This proved to be a significant advantage in the recent stock market correction as the index showed remarkable resilience to volatility. However, it’s also led to a reputation for delivering lacklustre growth.
While there’s an element of truth to this, apparently, someone forgot to tell Ashtead (LSE:AHT) that was the custom. The international equipment rental company has played an increasingly pivotal role within the construction industry. And with more firms becoming reliant on its services over the last decade and a half, the share price has exploded. In fact, since March 2009, its shares have surged by roughly 14,200%!
To put this in perspective, a £7,000 investment would have transformed into a portfolio position worth more than £1m today. Needless to say, anyone who held on during this time is likely patting themselves on the back right now.
Is another huge return coming?
Given the explosive performance of the stock and the continued industry dominance of Ashtead, can the FTSE 100 firm repeat this performance over the next 15 years? Sadly, I think it’s unlikely.
Today, the group operates with a market capitalisation of around £22bn. Delivering another 14,200% return would push this market cap to £3.1trn. That would make it one of the most valuable businesses in the world by today’s standards. And for an equipment rental enterprise, that certainly seems like a farfetched prospect.
However, this doesn’t mean the growth story is over. Looking at the group’s latest third-quarter results reveals a double-digit expansion of revenue and underlying earnings for the business. This cash flow is helping fund an aggressive expansion in North American markets, which undoubtedly opens the door to countless new opportunities. In fact, management has noted it’s already experiencing stronger demand in the US on the back of new mega infrastructure projects being pushed by government policy.
Considering the success Ashtead has achieved to date, the medium- and long-term potential of this enterprise looks promising, even if its millionaire return-making days are over.
Risk vs reward
Ashtead’s track record of exceeding expectations makes it difficult not to be optimistic for the future. However, like any investment, there are several risks to factor in.
The most notable is the cyclicality of the construction market. Throughout history, downturns and recoveries within this sector tend to lag the general economy by roughly one to two years. Assuming 2024 is no different, the group may not have yet felt the full impact of higher inflation and interest rates on its operations.
According to the latest results, management hasn’t been able to fully offset inflationary costs through rental price hikes. And that’s eaten away at its profit margins.
This may only be a short-term threat. However, a prolonged downturn or slow recovery could cause Ashtead shares to move in the wrong direction. But with the stimulous provided by the US government’s $1trn investment into national infrastructure, the firm seems to have a long list of upcoming megaprojects to capitalise on.
