The last year has been bumpy for US stock markets as the Federal Reserve’s interest rate hikes drove up borrowing costs and dampened sentiment. President Donald Trump’s trade war threats also didn’t help.
This has hit top FTSE 100 companies with major exposure to the States, such as Ashtead Group (LSE: AHT) and Ferguson (LSE: FERG), both of whom generate the vast majority of their profits from the world’s largest economy.
Both struggled over the last year, their share prices falling 17% and 5% respectively, but that could be about to change. After six interest rate rises since 2015, markets are penciling in an 80% chance of a Fed interest rate cut in July, and maybe one or two more before the year is out.
On the rebound
This could drive US markets back up, particularly if Trump follows through on Twitter pledges to hold “an extended meeting” with Chinese president Xi Jinping at next week’s crucial G20 summit in Japan.
Markets are already surging in anticipation of these two events and this could signal brighter times ahead for Ashtead and Ferguson.
Equipment rental supplier Ashtead could do with a construction boom, although it’s doing well without one. It reported pre-tax profits up 17% to £1.22bn earlier this month, as it grows by snapping up smaller rivals and adding them to its Sunbelt brand.
Ashtead also increased its full-year dividend to 40p, up 21% from last year’s 33p. It should further reward shareholders with a £500m shares buyback. A slight concern is net debt, which grew from £2.71bn to £3.75bn over the year, largely due to acquisitions.
The Ashtead share price isn’t cheap, trading at 17.28 times earnings. And with US construction slowing, it needs the added boost of lower borrowing costs and the lifting of trade war concerns. Will it get them? We may find out soon.
Plumbing supplier Ferguson also announced a generous share buyback offer this month, this time of $500m, in its quarterly results to 30 April. These showed ongoing revenue up 6.2% overall to £5.27bn, with disappointing UK growth boosted by a better ongoing US performance at 8.4%. That’s handy, given that it generates around 80% of its earnings from the States. Ongoing trading profit of $359m was $8m ahead of last year, while it generated $632m of operating cash in the quarter.
Ferguson stock has delivered an annualised rise in dividends per share of 15% in the last four years, which compensates for a relatively low current yield of 2.58%.
The Ferguson share price now trades at just 14 times forward earnings. But there are potential clouds on the horizon, notably in Canada, where the property market is slowing due to tighter laws on mortgage lending.
After years of strong earnings growth, analysts have been alerting investors to data suggesting the US housing market is also weakening. Against that, you have to set the prospect of cheaper interest rates and a trade deal boost, which could turn things round.
If you want exposure to a resurgent US economy, Ashtead and Ferguson could be worth a look.
Harvey Jones 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.