The FTSE 100 index has had a good run recently, rising to new all-time highs. However, investors shouldn’t see this as a roadblock as there are still plenty of opportunities for stock pickers.
Here, I’m going to highlight a stock within the UK’s large-cap index that I believe has the potential to rise substantially over the next two years. In my view, it’s worth a look right now.
An industrial powerhouse
The company in focus today is Ashtead (LSE: AHT). It’s one of the world’s largest construction equipment rental companies.
Operating across both North America and the UK, it rents out things like bulldozers, excavators, and generators. All told, it has over a million rental assets.
Why I’m bullish
The main reason I’m bullish here is that Ashtead generates the bulk of its revenues in the US these days. And over the next two years, I expect to see a ton of large-scale construction activity there.
Not only does the US look set to build lots of data centres and semiconductor manufacturing plants in the years ahead in an effort to get an edge in the global technology race, but there should be a fair bit of reshoring activity across the country. This backdrop should lead to high demand for construction equipment and boost Ashtead’s revenues and earnings.
Note that next financial year (starting May), analysts expect the group’s earnings per share to rise by 14.4% (to $4.35). If we see this kind of earnings growth, the stock could start to motor higher.
Looking at that earnings forecast, the stock’s forward-looking price-to-earnings (P/E) ratio is 16.3. So, the price-to-earnings-to-growth (PEG) ratio is just 1.13 (a ratio near one can signal that there’s value on offer).
Lower interest rates could boost earnings
It’s worth pointing out that there are a couple of other catalysts that could potentially boost the share price. One is lower interest rates in the US.
This could lead to higher levels of profitability due to the fact that the company has a material amount of debt on its balance sheet ($10.3bn at the end of April). Last week, the US Federal Reserve cut rates by 0.25% and signalled that more cuts are on the way.
Moving to the US
Another potential catalyst is the company switching its main listing to the New York Stock Exchange and changing its name to Sunbelt Rentals. This is set to happen in March and it could lead to increased interest in the stock (the US has a much larger investor base).
Note that this move won’t affect UK shareholders in a big way. The stock will leave the FTSE 100 index, however.
Worth a look
Of course, there are a few risks that could derail my investment thesis here.
One thing to bear in mind is that parts of the construction industry can be very cyclical (up and down). Therefore, there’s a chance that, in two years’ time, some areas of the industry could be under pressure.
The company could also decide to spend more money on construction equipment to renew its inventory. This could lead to lower levels of profitability.
However, I’m quite optimistic about the medium-term outlook. I see plenty of potential here and I believe the stock is worth considering at current levels.
