One of the handful of out-and-out growth shares that I kept after I turned 50 is the FTSE 100’s Ashtead Group (LSE: AHT). My focus has been on maximising my dividend returns from high-yield stocks so I can further reduce my working commitments.
In 2024, the firm paid a total dividend of $1.05 (80p). This generates a 1.5% return on the current share price of £52.35, so high-yielding it is not.
It is not a very sexy business either, so it tends to get overlooked by many smaller investors. All it does is rent out construction and industrial equipment to other firms.
However, for a long time it has done so to great effect. It is the largest equipment rental company in the UK and the second largest in the US. It also has a market share of 9% in Canada.
Biden’s big boost to business in 2022
Ashtead was given a huge boost in 2022 from two pieces of US legislation that came into view that June. They were both enacted that August.
One was the $52bn CHIPS and Science Act aimed at dramatically increasing the US’s manufacturing of semiconductors. The other was the $891bn Inflation Reduction Act geared to raising the country’s production of clean energy, among other things.
In both cases, it remains cheaper and faster for a business to rent certain necessary equipment than to buy it. Given this, Ashtead’s share price leapt 84% from end-June 2022 to its 12-month traded high of £61.79 on 16 May.
How do the latest results look?
Ashtead’s major risk now in my view is any change in these two key US policies under a new president in November.
However, Q1 2024/25 results released on 3 September saw EBITDA rise 5% year on year to $1.3bn. Total rental revenue jumped 7%.
Operating profit dropped by 2% to $688m from $703m. However, over the same period, the firm invested $855m adding 33 new locations to its US and Canadian operations.
For the year ahead, Ashtead Group’s guidance is for rental revenue growth of 5%-8%.
Consensus analysts’ estimates are for earnings per share to increase 13.2% by the end of its fiscal year 2026/27. Return on equity is forecast to be 23% by that time.
Are the shares undervalued?
Ashtead Group currently trades on the key price-to-earnings (P/E) ratio measurement at 19.1. Rather than being undervalued, this looks overvalued against the average 13 P/E of its peer group.
This comprises H&E Equipment Services at 9.7, Herc Holdings at 11.1, and United Rentals at 17.6.
The same overvaluation applies on the price-to-book (P/B) comparison, with Ashtead Group at 4.1 against a competitor average of 3.7. And at 1.8 compared to a peer average of 1.8, the firm also looks overvalued on the price-to-sales (P/S) measure.
That said, of the 18 analysts who cover the stock, the current average one-year price target is £62.39. This implies a potential gain of 20%.
Nonetheless, I will not buy any stock that is not significantly undervalued on at least one of the three key measurements I use – P/E, P/B, or P/S.
Instead, I will keep the shares I already have and review them after the next quarter’s results on 10 December.
The post Is it time for me to buy more of this overlooked FTSE heavyweight after Q1 results? appeared first on The Motley Fool UK.
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Simon Watkins has positions in Ashtead Group Plc. 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.
