Ashtead Group‘s (LSE:AHT) the largest holding in my portfolio. I own more of its shares than any other FTSE 100 share including Legal & General, Diageo and Aviva.
But despite my substantial holdings, Ashtead’s recent share price slide was too significant for me not to act on. Like Warren Buffett, I love buying quality stocks when they’re marked down.
Here’s why I’m a huge fan of this fallen Footsie hero.
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Under pressure
In truth, things have been pretty miserable at the rental equipment provider of late. This month it slashed its profit estimates for the fourth time in just five quarters.
Downgrades are always hard for the market to swallow. They’re especially shocking when they come from with impressive records of upgrading their forecasts, like Ashtead has had in the past.
Weak conditions in North America are deeply impacting the performance of its Sunbelt brand. This month, Ashtead said that “local construction markets have been affected by the prolonged higher interest rate environment” and that pre-tax profit dropped 4% in the six months to October.
The group sources more than 90% of revenues from the US, so weakness here’s a big deal. As a consequence, rental revenue growth estimates were slashed to 3% from 5% for the full year. This is down from 5% to 8% previously.
Oversold?
Some share price weakness was understandable following mid-December’s update. But the scale of the decline was hard for me to fathom. Between the statement’s release and me increasing my stake on Wednesday (16 December), Ashtead’s share price dropped a whopping 18%.
My decision to buy more stock may haunt me if business remains slow. But as a patient investor, I’m prepared to suck up a little bit of pain for the possibility of long-term gain.
20.1% return
Over this sort of timescale, I’m optimistic my Ashtead shares will prove an excellent investment.
I’ve already enjoyed fine returns since I first bought its shares in April 2020. Back then, Ashtead was valued at £23.33 per share, considerably lower than the price of £51.23 than the stock’s valued at today.
Combining share price gains and dividends since I opened my position, I’ve enjoyed an average annual return of 20.1%. That’s more than three times the FTSE 100 average of 6%.
Bright future
Past performance isn’t a reliable guide to future returns. But I’m confident Ashtead can keep delivering stunning returns as it successful expansion strategy rolls on.
From a market share of 6% back in 2014, its take of the US market now stands at 11%. With the rentals market still highly fragmented, the business has substantial scope to embark on further profit-boosting acquisitions.
On top of this, Sunbelt’s revenues could sharply improve from this point as interest rate cuts boost the construction sector. They’ll also benefit from a steady stream of US mega-projects coming online, an area in which Ashtead’s scale makes it a major player.
Following their recent drop, Ashtead shares now trade on a forward price-to-earnings (P/E) ratio of 17.1 times. I think that’s a bargain for a stock of this calibre and is worth considering.
