Ashtead‘s (LSE: AHT) one of my favourite FTSE 100 shares. Over the long term, the construction equipment rental company has generated an incredible amount of wealth for its investors (it’s up more than 100-fold over the last 20 years).
Last week, Ashtead got a new Buy rating from a City broker. Here’s a look at the details and price target.
Lofty price target
The broker I’m referring to is Berenberg. On (19 September), it announced it had initiated coverage of Ashtead shares with a Buy stance. Its price target for the Footsie stock’s 7,000p, which is about 23% above the current share price.
Berenberg’s analysts believe that over the longer term, Ashtead – which generates a large chunk of its revenues in the US these days – is well-placed to take market share and capitalise on opportunities such as mega projects and data centre construction. The analysts also expect Ashtead’s profit margins to rise over the medium term.
I’m bullish
Now, I totally agree with Berenberg’s bullish investment thesis. I’ve been raving about this company’s potential consistently over the last year. With the US currently in the midst of a huge multi-year construction boom (infrastructure, data centres, semiconductor plants, on-shoring factories, etc), I reckon Ashtead is well placed for growth in the years ahead.
But there’s one other reason I like the look of this stock today. And that is that interest rates are coming down. You see, Ashtead has a decent amount of debt on its balance sheet (which adds risk). And this has been expensive to service with rates at high levels.
With the US Federal Reserve cutting rates by 50 basis points last week however, things are looking up for Ashtead. Lower rates should lead to lower interest expense, which should, in turn, lead to higher levels of profitability (and a higher share price).
Reasonable valuation
As for the company’s valuation, I think it’s currently quite reasonable. With analysts expecting earnings per share of $3.96 this financial year (ending 30 April 2025) and $4.55 the next, the P/E ratio‘s 19.2, falling to 16.7.
At those multiples, I think the stock’s capable of delivering attractive returns in the years ahead. The dividend yield of around 1.5% will help here.
Expect volatility
Now, one drawback of this stock is that it’s volatile. Whenever there’s an economic growth scare, it tends to slide (because construction’s a cyclical industry that’s vulnerable to economic weakness). So it’s probably not the best stock for those seeking stability within their investment portfolios.
However, for those with a long-term investment horizon that are comfortable with a bit of volatility (like myself), I think it’s worth considering. I reckon there’s a good chance that it will beat the FTSE 100 index over the next five years given the backdrop in the US.
