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This share led the FTSE 100 on Tuesday. Here’s why I’d buy it for my 2021 ISA

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Ashtead Group (LSE: AHT) posted first-half results Tuesday. In response, capping an excellent year so far, the Ashtead share price jumped 6% in early trading. By mid-afternoon the rise stood at 4%, with Ashtead leading the FTSE 100 index on the day.

2020 is a year that most investors might prefer to forget. But Ashtead shareholders have had a terrific time. Despite the Covid-19 pandemic knocking most shares for six, Ashtead is up 40% year-to-date, way ahead of the Footsie’s 13% loss.

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Ashtead shares initially fell harder than the FTSE 100 in the early days of the pandemic. But they’ve since come storming back in one of the recovery stories of the year. Those who managed to buy right at the bottom have trebled their investment in as little as nine months. It’s all exciting stuff from an equipment rental firm, something we might normally expect to be dull as ditchwater.

Enviable FTSE 100 result

Ashtead put in a strong second quarter, resulting in underlying revenue falling just 4% over the six months to 31 October. EBITDA fell by a very modest 7%. Underlying EPS did drop 19%. But the 89p earned per share is still very healthy, and something most FTSE 100 companies can really only dream of in 2020.

On the balance sheet front, things are looking very impressive. Ashtead reported record free cash flow of £822m. And its net debt to EBITDA ratio is coming down, to 1.7 times from 1.9 times a year previously. The interim dividend is maintained at 7.15p per share.

What’s the secret of Ashtead’s success? Chief Executive Brendan Horgan put it down to “the successful execution of our long-term strategy, which we embarked upon after the last recession, to broaden and diversify our end markets and strengthen our balance sheet.”

He added that “we now expect full year results ahead of our previous expectations.

Be prepared

Successfully negotiating a market downturn is all in the preparation. Too many FTSE 100 companies borrow their way to growth during healthy times, piling up debt and leaving nothing in reserve. Then when a crunch hits, they’re in trouble. That’s why I’m increasingly looking first to a company’s debt situation whenever I plan an investment.

It’s a bit like the stress tests our FTSE 100 banks have to undergo every year. I’m not too interested in how a company is managing its balance sheet during the good times. No, I want to see enough strength there to convince me it can handle a market slump without any real problems. Ashtead satisfies me on that score easily.

For the 2021–22 year, forecasts suggest a P/E of 19.5, which might seem a bit high. But Ashtead’s strategy has produced years of double-digit earnings growth. I expect more to come, and I rate the P/E as fair value.

Oh, and Ashtead has a progressive dividend policy too. The yield is only around 1.5% now, but the prospect of long-term growth ahead of inflation makes it attractive to me. I rate Ashtead a long-term ISA buy.

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Alan Oscroft 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.

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