UK Stocks

Are Ashtead shares now cheap?

Ashtead Group was the best performing FTSE 100 stock in 2021, but shares have fallen so far this year. Are Ashtead Group shares now a bargain?

It is more than just the performance of Ashtead (LON: AHT) shares in 2021 that is impressive. The company has consistently been a good performer since joining the stock market in 1993.

Shares are up almost 200-fold since 1993, roughly three-fold over the last five years, and in 2021, shares rose by around 70 per cent.

But was this performance justified?

There is a simple way of telling. All we need to do is look at historical results. Between 2015 and 2021, revenue at Ashtead Group increased from $3,259 million to $6,638 million. So while revenue growth was impressive, it was outstripped by growth in the share price. Does that mean the share price got too far ahead of itself?

If we look at profits, we get a better indicator. And since share price performance is meant to be a forward indicator of profit growth, I think we need to go back further than 2015.

Profit before taxation in the first half of 2013 at Ashtead Group was £207.8 million.

In the first half of 2021, it was £890 million.  So that’s a four-fold increase in profits before taxation over eight years.

I think you get the picture; after allowing for the principle that shares are meant to be a forward indicator, share price growth has roughly corresponded with profits growth.

But will it continue? Well, such an impressive track record can’t be ignored. As a result, I have a reason for optimism concerning Ashtead Group Shares and a reason for caution.

Ashtead Group operates in the industrial global industrial equipment rental — with diggers a key product. Via its US subsidiary Sunbelt Rentals, it is a significant player in the US market. It is also a market leader in the UK.

Its opportunity lies with build-back better. As the US and UK governments plan to support economic recovery from the pandemic, infrastructure spending becomes a key focus. Ashtead is well placed to benefit.

My concern is that fears over inflation and, linked to that, a labour shortage suggest there is less spare capacity in both the UK and US economies than previously thought. This could reduce the scale of infrastructure spending. Does this mean Ashtead doesn’t quite have the growth potential we thought it possessed last year?

Ashtead dividends have grown significantly over time, but because of its high P/E, yield is modest.

Nothing lasts forever. Shares can’t just go up year on year indefinitely. Is the Ashtead run drawing to a close? Maybe it is, but I still think the track record is too impressive to ignore. Shares have dipped roughly 15 per cent since early December. This could mean opportunity, and given this company’s proven ability to grow over many years, I think this is an opportunity that may be too tempting to ignore.

Not Investment Advice Indie Investor is for general information use only. It must not be relied upon by readers when making (or not making) their investment decisions. If in doubt you should seek advice from a professional financial adviser.

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