The share price of equipment rental company Ashtead (LSE: ASH) has been among the best performers on the FTSE 100 for some time. Over five years, the shares have risen in value by over 90%.
However, today the share price has taken a knock – having fallen by around 8% at the time of writing – on a day when the stock market more widely has also had a bad morning.
Reason for today’s fall
The main reason for the fall in the share price today has been a warning about the performance of the business in the UK. Although revenue in the UK rose 2.2% in the first half, competition and the sale of low returning equipment meant that profits slipped 32% to £30m. Management is now taking action to address the issues in the smaller UK division, A-Plant.
Part of the reason for investor concern was because analysts raised questions about Ashtead’s growing reliance on its much bigger US business, which makes up 86% of overall revenue.
Better overall performance
Profit before tax rose to £660m for the six months ending 31 October, while revenue was £2.68bn, a 14% rise. Earnings per share were up 10%, as the group saw a 17.3% rise in profit at its Sunbelt business in the US to £755.9m.
The strong overall performance of the group and continuing growth in the US reflect a longer-term trend in its results. This is not new for Ashtead investors and shouldn’t be too much of a cause for concern.
What next
With the P/E now down below 15, Ashtead shares are looking far cheaper than in previous years when the P/E was often up above 25. This primarily reflects the high level of earnings growth the company has been achieving in recent years, often as the result of acquisitions.
The problem will come if the US economy worsens. Ashtead has around £5.2bn of debt and the construction industry is highly cyclical. Ashtead has moved its capital expenditure to the lower end of the range meaning it’ll be between £1.4bn-£1.6bn which suggests management is not so confident looking forward.
It’s hard to know exactly what will happen next. It’s clear that Ashtead is a well-run business that has been rewarding shareholders for some time. But problems in the UK business and its vulnerability to any slowdown in the US economy does make it a slightly risky investment at the moment.
Strong economic news in the US and any breakthrough in the trade war with China are likely to send the shares upwards so investors should keep an eye on that news if they want to buy into this high-growth FTSE 100 company.
Over the longer term though, I think Ashtead will likely thrive in the US and this is why, with the share price now giving investors a P/E of less than 15, the shares are potentially very cheap, I feel.
