This FTSE 100 stock looks back on course, and I think it’s still cheap

Shares in this FTSE 100 stock didn’t react too well to the lastest news release, even though the company beat earnings expectations.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest £1,000 in Barclays right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barclays made the list?

See the 6 stocks

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.

Created with Highcharts 11.4.3Ashtead Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »