Can Ashtead shares break new ground this time?

A stunning performer in recent years, the shares have struggled recently at this level. Graeme Evans looks at where the mighty Ashtead could go from here. 

There's no stopping Ashtead at the moment, with the rental equipment firm reaping the rewards from conditions as obliging as they have ever been.

In particular, Ashtead's Sunbelt division in the United States continues to benefit from the momentum created by Donald Trump's tax reforms, as well as the structural trend away from ownership towards rental.

First quarter results comfortably beat expectations today, helped further by the weakness of sterling and resilient trading for A-Plant in the UK. Pre-tax profits of £286 million were 23% higher than a year ago.

The torrent of good news means Ashtead has room to increase and extend its share buy-back programme into the 2019/20 financial year.

Shares rose as much as 6% to 2,425p Tuesday and have more than doubled in the past two years, but that still leaves a 13x price earnings multiple that looks inexpensive for a stock delivering 20% a year growth in earnings per share.

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This caution is reflected in the recent share price performance, with Ashtead breaching £24 on at least four occasions this summer only to fall back.

The most optimistic target price among today's glowing set of broker notes comes from Jefferies at 2,750p, whereas many of the others adopt a more cautious stance in relation to such a cyclical stock as Ashtead.

Deutsche Bank, which has a hold rating at 2,025p, concedes that US unemployment is at multi-generational lows with new orders booming. 

Source: interactive investor      Past performance is not a guide to future performance

They add: "Conditions are as good as they have ever been, but as such it is difficult to avoid the view that multiples on cyclicals have to come down.

"The company is clearly executing well and there should be low to mid-single digit upgrades but we don't believe the stock should be up by more than upgrades."

JP Morgan thinks it is unlikely the group would suffer the same pain as in the 2008/09 downturn, helped by some counter-cyclical dynamics such as the young age of its rental fleet and scope to reduce capital expenditure.

It also believes Ashtead has the potential to double market share in the United States, driven by advantages such as scale, a wide range of products and markets and management’s ongoing investment in technology.

Sunbelt revenues increased by 21% to $1.17 billion in the quarter, which Ashtead said represented the benefit of cyclical trends as well as the "successful execution of our long-term structural growth strategy".

The strength of the Ashtead balance sheet means the company now has more operational and financial flexibility, including to expand through bolt-on acquisitions and into more specialist areas.

Having already spent £300 million under a share buy-back programme announced in December, the total outlay is now expected to be £675 million after Ashtead increased its commitment to £125 million a quarter.

A further £500 million will be spent in the 2019/20 financial year, while maintaining leverage within the target range of 1.5 to 2 times net debt to underlying earnings.

Chief executive Geoff Drabble said the company looked to the medium term with confidence: "Our business is performing well in supportive end markets. With the benefit of weaker sterling, we expect full year results to be ahead of our expectations."