Ashtead Technology (LSE:AT.) – not to be confused with FTSE 100 company Ashtead Group – is an undersea equipment rental company. The stock’s fallen around 32% over the last month.
The underlying business is growing, though. As a result, I think this could be a good name for investors to add to their lists of shares to consider buying.
Growth prospects
Ashtead Technology leases undersea equipment to businesses in the energy sector. Oil and gas accounts for around 70% of its sales, with the balance coming from renewables.
The company’s recent performance has been impressive, with revenues increasing by around 50% during the 2023 financial year. But there are some risks investors should be aware of.
Around half of the firm’s oil and gas revenues have come from decommissioning projects. By their nature, these won’t generate repeat sales, meaning growth has to come from elsewhere.
Ashtead’s prospects look bright, though. Around a third of its 2023 revenue growth came from acquisitions and a fragmented market should mean more opportunities in this area.
Over the longer term, the firm stands to benefit from the shift to renewable energy. Building offshore wind infrastructure should generate strong demand for its equipment.
The last few years have shown that this could take longer than expected. But if companies stick to oil and gas investments, Ashtead can supply expansion projects here as well.
Valuation
Ashtead Technology’s share price has fallen 32% over the last month. But even at today’s levels, the stock trades at a price-to-earnings (P/E) ratio of 19 based on the most recent earnings.
That’s not an obvious bargain, but there are a few things worth noting. The first is that taking the company’s reported earnings at face value might not be the best way to value the business.
Ashtead’s net income is complicated by costs related to its recent acquisition activity. Adjusting for these – as the firm does in its reports – the earnings per share increase from 30p to 38.3p.
On this basis, the implied P/E multiple is below 15, which is a lot more reasonable from a valuation perspective. But this does highlight another risk with the company.
Attempting to grow by acquiring other businesses can be expensive and even the best in the business can make mistakes. Overpaying for a target can be destructive to shareholder value.
Analysts are expecting Ashtead’s earnings per share to reach 50p by 2027. If the company hits those targets, the stock will look very cheap at today’s prices.
A stock to consider buying?
Ashtead Technology doesn’t get a huge amount of coverage, either from the media or analysts. But it’s a really interesting business that’s worth looking at closely.
Since the company’s management elected to buy it from its parent company in 2021, it’s grown impressively. And I think there could be more to come.
That’s why the stock’s on my list of shares to buy when I next have cash to deploy. I’m not saying it can’t fall further from here, but I’m fully expecting it to get back to where it was a month ago – and beyond.
The post This FTSE 100 spin-off’s down 32% in a month… but I’d back it to recover appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Ashtead Technology Plc. 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.
