There’s a FTSE 100 stock I’ve been watching for a while, and I think it could be a big winner in the UK’s economic recovery.
It’s Ashtead Group (LSE: AHT), and it looks to me like it just hit a turnaround point.
The equipment rental firm posted a Q1 update on 3 September, with earnings per share (EPS) beating expectations. And the share price duly spiked up 5% in early trading.
But by the end of the day, it had given up most of the gains. And at the time of writing, the share price is back around where it was before the update.
The market reaction looks out of touch with reality to me. So what happened?
Turning round
Ashtead suffered from the downturn in the construction industry in the days since the pandemic. And in each of the previous three quarters, it’s had to lower its forward guidance.
Back at full-year results time in June, Ashtead reported 10% growth in rental revenue. But it had been expecting 11%-13%. It’s still growth, but a miss is a miss.
But at Q1 time this week, the board kept its guidance for the full-year unchanged. It should be a bit below last year’s, at 5%-8% for rental revenue. But the 2023-24 year was mostly a bounce back from a tough previous year.
If Ashtead can sustain rental revenue growth at mid to high single-digit percentages for the next few years, I think it could turn out to be one of 2024’s best FTSE 100 buys.
Forecast growth
That’s pretty much what forecasts show. Analysts expect a small dip in earnings per share (EPS) for the 2024-25 year. But after that, they think we’ll see an increase of nearly 40% between 2025 and 2027.
If that comes off, we’d be looking at a price-to-earnings (P/E) ratio of about 13.5 by 2027.
That might not look screaming cheap on the face of it. And I do think that’s one of the biggest risks. Even if Ashtead has turned the corner and is set for earnings growth now, much of those expectations might already be built into the share price.
Net debt is also an issue, rising to $10.8bn (from $9.7bn). With a net debt to EBITDA leverage of 1.7 times, though, that’s still within the company’s target range. And forecasts have it falling in the next few years, as earnings rise.
Construction future
We’re also a long way from confirmation of a recovery in the construction business. And I think it might not take off again as quickly as many are hoping.
But the long-term future comes down to one key thing to me. Equipment rental firms like Ashtead are effectively very diversified. In that, I mean that whatever the actual construction going on, in whichever sector of the business, Ashtead gets the rental income.
For those who see long-term construction industry strength, I do think this is a FTSE 100 stock worth considering.
