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£5k to invest? I’d buy this FTSE 100 stock that’s turned £1k into £35k

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The top-performing stock in the FTSE 100 over the past decade wasn’t some high-flying tech company or consumer goods champion. It was, in fact, equipment rental group Ashtead (LSE: AHT).

Over the past decade, shares in this company have returned nearly 43% per annum. That’s enough to turn every £1,000 invested in 2009 to approximately £35,000 today. It looks as if the company can keep this performance going over the next decade as well.

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A profitable venture

Renting construction equipment isn’t a particularly exciting business, but it is lucrative. Most small builders can’t afford to buy much of the equipment they use on a day-to-day basis. It’s also inefficient for businesses, many of which are sole traders, to buy a piece of equipment they’re only going to use once or twice.

This is where Ashtead can help. Thanks to its size, the company has no problem buying pieces of kit in whatever quantities. It can usually negotiate a discount with suppliers because it’s such a large customer. What’s more, whereas a sole trader might use a piece of kit just once, Ashtead can rent its equipment out to a different customer every day.

This business model is highly profitable. The company’s return on equity — a measure of profitability on shareholder funds — has averaged 30% for the past six years. This puts Ashtead in the top 10% of the most profitable public businesses traded on the London Stock Exchange.

This ratio suggests that for every £100 the company invests in new equipment, it can make a 30% return over a year. That gives a payback period of just two and a half years.

These are just back-of-the-envelope calculations, but they clearly show just how profitable the equipment rental industry is, and why Ashtead has been such a lucrative investment over the past decade.

Reinvesting profits

If the firm continues to reinvest its earnings as it has done in the past, the sky could be the limit for earnings here. Even though the company has a market capitalisation of nearly £12bn, and reported total sales of £4.5bn last year, it’s still tiny in comparison to the size of the global construction equipment market.

Estimates suggest the market could be worth as much as £215bn by 2025. So, even if Ashtead manages to quadruple its revenues from current levels, it will still make up less than 10% of the global market.

As such, it looks as if this company will continue to generate market-beating returns for investors. Right now, the stock seems undervalued compared to the group’s long term potential. It’s dealing at a price-to-earnings (P/E) ratio of just 13.2. A dividend yield of 1.7% is on offer as well.

Considering Ashtead’s historical growth rate, and the potential size of the global construction equipment market, it seems highly likely to me that the company can repeat its successes of the past 10 years over the next decade. 

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Rupert Hargreaves owns no share 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.

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