Between early spring and late August, many indices worldwide had remarkable recoveries. The FTSE 100, the UK's leading equity index, staged a similar performance. Between mid-March and the last trading day in August, it gained more than 21%. But since then, it is been flat, up only 0.20%. Put another way, the market may be consolidating and moving sideways.
However, there is one stock that has been moving up in the past several weeks, and that is the UK-headquartered global equipment rental firm Ashtead (LON:AHT) (OTC:ASHTY).
Its business line could sound like a somewhat dull sector, but not for the company's shareholders. Year-to-date, the stock is up around 21%, which technically means it is in a bull market. The shares hit an all-time high on Oct. 8.
Today, we will look at this industrial equipment group whose presence in the U.S. and Canada is growing rapidly to see what investors can expect from the shares in the coming months.
Ashtead's North American Operations Are Growing
Ashtead has national networks in the U.S., UK and Canada, where it trades under the name Sunbelt Rentals.
The company serves a wide range of markets where its construction business tops the list. Its equipment can be seen in the building and remodelling of airports, bridges, roads, office and residential buildings, data centers, schools and retail outlets.
In recent quarters, its emergency response business has also been growing. The sector includes fire, weather-related incidents (such as hurricanes, storms or flooding), residential emergencies, mobile testing facilities and COVID-19 related emergency management.
The firm has been designated as an essential business in the U.S., UK and Canada in times of need and emergency. In addition, facilities maintenance firms or live-event organizers also rent them from company.
The group has always had a sizable footprint in the U.S. We now see an increased focus on North America. Management highlights:
"The U.S. continues to be our largest market and we see significant potential in our newest market, Canada. The UK market is a much more subdued environment than North America."
On Sept. 8, the company released financial results for the first quarter ended July 31. Although the company was adversely affected by the pandemic, both revenue and earnings beat expectations. Revenue was £1.2 billion ($1.55 billion), and statutory earnings per share (EPS) were £0.32 ($0.41).
CEO Brendan Horgan said:
"This resilient performance illustrates the successful execution of our long-term strategy, which we embarked upon after the last recession, to broaden and diversify our end markets and strengthen our balance sheet… The actions we took to optimize cash flow, reducing capital expenditure and operating costs, resulted in record free cash flow for the first quarter."
The quarterly results also showed more than 80% of revenue from the U.S. In recent weeks, construction business has been picking up in the country. In return, that meant increased rentals for industrial items like forklifts, trucks, diggers and generators. Management expects a further structural shift to renting, rather than owning, by customers.
In June, the U.S. administration announced it would push for an infrastructure spending bill of around $1 trillion. Then, the House passed an alternate $1.5-trillion infrastructure bill. We do not yet have a final agreement from both sides of the aisle. However, whoever wins the U.S. Presidential Election, we are likely to see further public spending in the country. The U.S. will continue to construct highways, bridges, public buildings or IT infrastructure, and that can only be good for shares prices of Ashtead and its peers.
Analysts agree that a combination of robust earnings results, stable dividend policy and growth of the U.S. operations has been behind Ashtead shares' solid performance.
Bottom Line
Recent metrics show that, by revenue, Ashtead is the second-largest equipment rental company worldwide. It follows United Rentals Inc (NYSE:URI). URI stock is also up over 19% YTD and hit an all-time high on Oct. 8.
Given the potential growth in the industrial rental sector, we like shares of both companies. The long-term strength of their stock prices are likely to continue. However, due to the recent run-up in price, we would consider waiting for a pull-back in either stock before committing capital into the business.
On a final note, the forward P/E ratios of Ashtead and United Rentals are 22.68 and 12.77, respectively. P/S ratios also show a similar trend, whereby the metric for Ashtead is 2.92 and United Rentals is 1.65. Although these numbers would not be enough to make an investment case, at this point Ashtead is more richly valued than its main competitor.