Within the FTSE 100, equipment rental company Ashstead (LSE: AHT) has been a rip-roaring success and multiplied its shareholders’ money many times.
Back in 1990, the then British operator acquired America’s Sunbelt Rentals and it’s never looked back, going from strength to strength.
The firm’s organic growth and acquisition strategy has since driven rapid expansion in the US and also taken operations into Canada.
Today, around 80% of the company’s rental stores are in the US with the rest in the UK and Canada.
Potential growth ahead
But after such strong progress and triumphant market share gains, can there be much left in the tank to power further returns for shareholders? I believe there is.
One of the great things about rental businesses is they are powered by economic activity itself. If other industries are busy — whether profitable or not — they tend to use equipment provided by companies like Ashtead.
So owning shares in Ashtead can be a great way of riding the coattails of other enterprises without becoming embroiled in all the operational challenges they face.
On top of that, Ashtead has proven to be well directed and has kept expanding to gain an even bigger slice of the economic pie.
I think the company’s journey looks far from over, and today’s (3 September) first-quarter results report provides some clues that growth is continuing.
In the three months to 31 July, currency-adjusted rental revenue rose by 7% year on year. Meanwhile, the bolt-on acquisition programme continued to roll out and the firm added 33 rental locations to its estate in North America.
The growth juggernaut is ploughing on. Although the reliance of the business on general economic activity is a double-edged sword.
Cyclical sensitivity
There’s no denying the company is vulnerable to general economic slowdowns and shocks. If other businesses struggle and their work dries up, they’ll use Ashtead’s rental equipment less.
There’s evidence of such cyclicality in the company’s financial and trading record, and in the share price chart.
It would be easy to mis-time an investment in Ashtead shares and lose money. I think that’s perhaps the biggest risk for shareholders here.
Nevertheless, today’s outlook statement asserts that the business is in a position of strength. The directors think it has the operational flexibility and financial capacity to capitalise on the structural growth opportunities they can see for the business.
Results for the full year will likely be in line with expectations, and they look forward to the future with “confidence”.
Based on past performance, I find the board’s optimism to be encouraging. Meanwhile, the company also announced its new chief financial officer as Alex Pease, who will start as CFO designate in October.
It looks like another strong appointment to the management team. Pease was previously CFO of Westrock until its recent merger with Smurfit Kappa.
Ashtead has been a good performer. But on balance, and despite the risks, I still see it as well worth further research and consideration now. To me, it looks like a decent candidate for a diversified portfolio of stocks focused on the long term.
