Like Warren Buffett, I love to buy quality stocks when they’re on sale. So the 10% decline in Ashtead Group‘s (LSE:AHT) share price today (10 December) has really grabbed my attention.
At £56.40 per share, it’s the FTSE 100‘s largest faller in Tuesday business.
I already hold Ashtead shares in my Self-Invested Personal Pension (SIPP). And following today’s drop, I’m considering adding to my stake.
Interest rates bite
Ashtead’s operations are very cyclical. When economic conditions worsen and/or interest rates rise, demand for its diggers, vans and plant equipment — which operate under the Sunbelt brand — tends to follow suit.
And so Tuesday’s half-year update came in pretty weak.
Revenues rose 2% between May and October, to $5.7bn, while rental revenues increased 6% to $5.3bn. However, this was worse than expected, and caused pre-tax profit to drop 4% over the period, to $1.2bn.
Ashtead said this was caused by troubles in North America where “local construction markets have been affected by the prolonged higher interest rate environment.” Problems were especially severe in the US where the business sources 92% of group profits.
Guidance downgraded
Full-year US rental revenues are now expected to rise between 2% and 4%, Ashtead said, down from a previous forecast of 4% to 7%.
This also means corresponding group revenues are tipped to increase between 3% and 5%. Growth of 5% to 8% had previously been expected.
Planned capital expenditure has also been trimmed in response to the tougher conditions. This is now put at $2.5bn-$2.7bn for the full year, down from the $3bn-$3.3bn bill previously touted.
Rays of sunshine
While it was a pretty grim update overall, there were some crumbs of comfort for investors to celebrate.
Ashtead’s free cash inflow was strong at $420m, flipping from a $355m outflow the year before. So full-year free cash flow estimates were upgraded to $1.4bn from $1.2bn previously.
As a consequence, the firm announced plans to repurchase $1.5bn worth of its shares during the next 18 months.
Ashtead also tipped revenues to pick up if (as expected) interest rates continue to fall. It said that “underlying demand continues to be strong” in North American construction markets, adding that “we expect this segment to recover as interest rates stabilise.”
In other news, Ashtead announced plans to switch its primary listing from the London Stock Exchange to the US “over the next 12-18 months.“
While a blow to the UK stock market, this is likely to have little-to-no adverse impact on shareholders.
What does this mean?
As an owner of Ashtead shares, Tuesday’s update is naturally a disappointment. However, it doesn’t affect my bullish view on the company’s long-term potential.
The rental giant can’t control external conditions. It can only manage how it responds to the broader environment. And today’s update shows it’s making a good fist of it, with organic revenues continuing to grow.
I’m also encouraged by Ashtead’s improving balance sheet despite tough conditions. Strong free cash flow meant the company’s net-debt-to-EBITDA ratio improved to 1.7 times, further inside the firm’s target of 1 to 2 times.
This sets the company up to continue its successful long-term expansion strategy.
Despite already owning Ashtead shares — it’s the largest single holding in my portfolio — I’ll consider increasing my stake in the coming days.
