Shares of construction equipment renter Ashstead (LSE: AHT) have more than doubled over the past year due to growing profits and analysts’ expectations for a massive infrastructure investment plan in the US. This would be a big deal for the company because roughly 75% of revenue comes from the US. But with the firm’s shares trading at a full 16 times forward earnings has the market got ahead of itself?
Well, on one hand the 16x forward P/E is below the company’s average valuation of 18 times earnings for the past five years. And the company has been growing nicely, with the US subsidiary, Sunbelt Rental, posting an 8% year-on-year rise in USD revenue in the half to October and a 100 bip improvement in operating margins to a very good 33%. While the UK subsidiary, A-Plant, has significantly lower operating margins, 19% in H1, and is smaller, it too is growing sales and profits at a solid clip.
But I have my concerns that the recent rally in Ashtead shares may be putting the cart before the horse. For one, we do not know with any certainty that Donald Trump can, or even will attempt, to push an infrastructure investment bill through Congress. For another, the company operates in a highly cyclical industry that appears to be at or near its peak. And underlying EPS growth, which grew at a CAGR of 49% between 2012 and 2016 is now forecast to slow to 22%, 15% and 7% over the next three years respectively. Ashtead is a well-run business with high margins but is not a stock I intend to hold at this point in the economic cycle.
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Another big winner over the past year has been Standard Chartered (LSE: STAN), whose shares have risen over 85% in value due to resilient economic performance from emerging markets and hopes that the bank’s turnaround plan is bearing early fruit.
With shares of the emerging market-focused lender still trading at just 0.88 times book value, are investors looking at what is just the beginning of a long rally?
That depends largely on two factors. The most important is whether or not the crises—weak commodity prices, rising US interest rates and high debt—that rocked emerging markets in 2015 and early 2016 have passed. On this front there is good news as a slew of important developing markets are looking relatively robust, in particular China, which accounts for around 70% of Stan Chart’s profits. The fact that the value of non-performing loans on the bank’s books stayed flat between Q2 and Q3 is very encouraging.
The other factor that will determine what happens to the bank’s share price is its turnaround plan that is seeking to shore up capital reserves, divest poor-performing assets and cut costs. The company’s $5.1bn rights offer in late 2015 has certainly shored up its balance sheet, with its CET1 ratio clocking in at a solid 13% in Q3. There is also slow but steady progress in cutting costs, which together with rising interest rates should improve profitability. There’s still a long way to go but the new and improved Standard Chartered is looking quite attractive to me.
