Ashtead Group (LSE: AHT) is the best-performing stock in the FTSE 100 index in the past year. It has outperformed the broader index by a huge margin. Its 170% dwarfs the FTSE 100’s, approximate 25% rise.
It’s the dream of every investor to build a profitable portfolio. However, we cannot just buy a stock because it has given stellar returns in the past. So, I would like to take a deep dive analysis to better understand the company.
The bull case for this FTSE 100 stock
The past year has been challenging for every company. One key reason why this equipment rental specialist has outperformed the broader market is its strong fundamentals. Next, it has a simple yet powerful business model. It purchases equipment, rents it out on a short-term basis, and sells old equipment in the second-hand market. Construction companies now prefer to rent equipment from companies like Ashtead over buying them outright due to huge capital costs.
Next, the company caters to a wide range of industries. This has helped it to continue with good results. Revenue for the nine months ended 31 January was down 2% year-on-year to £3.8bn. It also benefitted from being treated as an essential business. It provided vital equipment to first responders, hospitals, telecom, and utility companies, among others.
The company had a steady growth of revenues. I believe this is one reason the company has consistently provided good returns to its shareholders. The stock, which traded around 1,000p in 2016, is currently trading at about 4,650p. Revenue grew from £2.5bn in fiscal year 2016 to £5.1bn for fiscal year 2020.
Ashtead Group has been generating good free cash flows, which I like. This is true for many investors and can also be seen in the company’s strong stock returns. Year-to-date, it generated a free cash flow of £1.1bn. It was also able to lower net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) leverage to 1.6 times from 1.9 times, a year back. This was also towards the lower end of the company’s guidance.
Risks to consider in this FTSE 100 stock
There is no stock without any risks. I need to carefully analyse the company and not get carried away with the past returns. The stock is currently trading at a price-to-earnings (P/E) ratio of 34. This is expensive when compared to its five-year average of 15. I feel it’s better to not rely only on the P/E ratio. So I would like to know the price-to-book ratio, which is 6.7. This is also higher compared to the five-year average of 4.03.
Ashtead Group has a sustainable business model. Management has been proactively taking the right decisions. However, I am not a buyer of the stock for my portfolio because I consider the shares are overvalued at the current prices. For now, I will keep it on my watchlist.
Royston Roche has a position in BT-A shares. 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.