Ashtead Group plc Surges As Profit Beats Expectations

Industrial equipment rental firm Ashtead (LSE: AHT) is surging this morning after the company unveiled an impressive set of second quarter results. Additionally, the group issued an upbeat trading outlook as Ashtead continued to benefit from the recovering construction market within its two key markets; the UK and US.

Ashtead’s second quarter pre-tax profit increased by 33% to £141.7m, compared to a pre-tax profit of £110.4m as reported in the year ago period. Earnings per share jumped to 18p for the quarter, up 34% year on year. Further, management noted that the strong demand for Ashtead’s services has continued into November and now the company expects a full year result ahead of its previous expectations.

As a result of Ashtead’s strong performance and outlook, management hiked the company’s interim dividend payout by 33%.

Ashtead’s chief executive, Geoff Drabble, commented:

“The Group delivered another strong quarter with record underlying pre-tax profits…With both divisions performing well, recovering end markets, and a proven track record of market share gains, we now anticipate a full year result ahead of our previous expectations.”

A price worth paying?

Unfortunately, if you want to get in on the Ashtead growth story, you’re going to have to pay a hefty price. At present, based on current City analyst forecasts, Ashtead trades at a forward P/E of 19.9. However, as the company is now expecting to report results ahead of expectations, this figure is out of date. The company’s forward valuation should fall slightly over the next few weeks as City analysts revise their figures.

Still, for growth investors, who are not overly concerned about the company’s high valuation, or token dividend yield of 1.3%, Ashtead could be a good pick. With earnings set to expand by more than 30% this year and forecasts predicting further earnings growth of 20% next year, the company’s shares offer growth at a reasonable price. Based on current figures Ashtead’s PEG ratio is 0.7.

That being said, Ashtead operates within a highly cyclical industry and the company requires a strong construction market to maintain a high level of earnings growth. Indeed, Ashtead’s shares crashed to 45p during the financial crisis, as demand for industrial equipment evaporated.

With this in mind, Ashtead’s high valuation concerns me, if the global economic recovery falters, and the demand for Ashtead’s equipment declines, the company’s share price could rapidly fall back to earth.  

Investing for the long-term 

Ashtead is the perfect cyclical share to profit from an economic recovery but if things take a turn for the worst, investors could be left out in the cold. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.