The selling of FTSE shares intensified last week in the wake of recent bank collapses. This is totally understandable, given the uncertainty around what might happen next. Many investors have chosen to sell first and ask questions later.
However, every stock market storm in history has eventually blown over. And I’m sure this one will too, though nobody knows exactly when.
Meanwhile, I’d buy the dip in this FTSE 100 stock, which has fallen 18% in less than three weeks.
Tools for the job
Ashtead (LSE: AHT) rents out construction equipment in the UK and North America. That’s everything from diggers and cranes to hard hats and scaffolding. Indeed, the breadth of its product offering enabled it to keep growing even through the pandemic.
The firm, under its Sunbelt Rentals trading name, ended up winning around 80% of the contracts issued by the Department of Health to set up Covid testing centres around the UK. Its scale and expertise (and the sheer amount of traffic cones and barriers it owned) proved invaluable.
Around 80% of the company’s revenue today comes from the US. In fact, it’s the second-largest plant hire group in North America.
Yet the overall industry in the US remains extremely fragmented, with the two leading firms commanding only around a quarter of the market between them. That leaves ample room for Ashtead to continue gaining market share through organic growth and acquisitions.
Raising guidance
Ashtead recently released a trading update. For the nine months to 31 January 2023, the firm reported $7.2bn in revenue. That was a 25% increase over the same period last year and was ahead of its own expectations.
Its profit before tax rose by 33% and its adjusted earnings per share jumped by 30%.
However, management did say capital expenditure for the full year would be $3.5bn to $3.7bn, ahead of its previous guidance. And looking forward, it plans to spend as much as $4.4bn next year.
Most of this will be in its US business, and it’s much more than analysts were anticipating.
So why is the firm massively increasing its spending across the pond?
One word: legislation.
Mega-projects
Recent legislation passed in the US should directly benefit Ashtead in the years ahead. Firstly, a massive $1.2trn infrastructure bill will fund the rebuilding of the nation’s deteriorating roads, bridges, railways, and airports.
Then there’s the $370bn Inflation Reduction Act, which offers clean energy incentives to companies in the US. And finally, there’s the $52bn CHIPS Act aimed at onshoring semiconductor production.
These mega-projects are expected to lift overall demand in the plant hire market. And this explains why the company is investing heavily in new rental equipment to service this demand. I think that’s a smart long-term move by management.
That said, this strategy isn’t without risk. There’s still a distinct possibility that the US economy could be heading for a recession this year. That would have a knock-on effect on the whole construction industry and could impact the company’s growth.
However, I think investors can take comfort in the stock’s reasonable valuation. It has a price-to-earnings (P/E) ratio of 16.6.
I believe the share price dip presents a buying opportunity. And I intend to seize it myself soon.
