Ashtead Group PLC (LSE:AHT, Financial) stands out as a premier equipment rental provider, commanding a significant presence in the equipment rental sector across the United Kingdom, United States and Canada. The company's core clientele comprises non-residential construction businesses seeking a wide array of equipment and tools for their projects, while avoiding the challenges associated with equipment ownership and management.
The comprehensive equipment catalogue
Ashtead boasts an extensive equipment inventory, encompassing a diverse range of tools and machinery tailored to the needs of construction projects. From work platforms, scaffolding and ladders to concrete equipment, air conditioning units, loaders, forklifts and more, the company offers a comprehensive suite of tools to ensure efficient project execution.
Dominating the U.S. market
The company's influence is most pronounced in the United States, where it operates under the name Sunbelt. Through strategically located outlets in major U.S. metropolitan areas, the company has positioned itself as a market leader. Despite the construction industry's cyclicality, marked by periods of growth and contraction, Ashtead has consistently demonstrated the ability to navigate these fluctuations successfully, maintaining growth throughout economic cycles.
Resilience in shifting tides
The company's resilience is evident through its consistent performance. Over the past decade, its shares have surged by over 800%, outpacing the FTSE All-Share Index's modest 67% growth. This remarkable track record underscores Ashtead's agility in capitalizing on market opportunities and sustaining a competitive edge.
Navigating cyclicality
Ashtead's profitability and return on investment naturally fluctuate with the economic environment. Notably, the aftermath of the 2009 financial crisis led to a dip in return on investment and profit margins. The company, however, displayed resilience during the Covid-19 pandemic, underscoring its adaptability to unforeseen challenges.
Over the past decade, Ashtead's profit margins have consistently trended upward, accompanied by impressive return on investment figures. Comparing profitability against U.S. peers such as United Rentals Inc. (URI, Financial) reveals a common trend: larger companies tend to enjoy superior profitability, suggesting a correlation between scale and financial performance.
Strategic investment bolsters profits
The company's profitability benefits from strategic investment endeavors. Ashtead has consistently allocated substantial resources to expand its rental equipment portfolio and establish new sales outlets. This growth-focused approach aligns with significant investments in acquiring smaller rental companies, a trend shaping the U.S. market landscape. These strategic investments have substantially contributed to profit augmentation.
Driving growth through robust free cash flow
A crucial yardstick for business evaluation is the generation of free cash flow. Ashtead calculates free cash flow by deducting replacement or stay in business capital expenditure, a methodology endorsed by renowned investors like Warren Buffett (Trades, Portfolio) and Terry Smith.
Ashtead's transparent reporting of this data reveals a decade-long trend of robust and growing free cash flow generation. This financial resource has fueled diverse growth initiatives, including business expansion, acquisitions, dividends and share buybacks.
Transparency in profit realization
Addressing historical skepticism towards rental companies' profitability, Ashtead's transparency sets it apart. Consistent profits from the sale of used rental equipment refute doubts about under-depreciation. Moreover, the thriving second-hand market has further bolstered profits from this segment.
Favorable U.S. rental market growth prospects
Despite concerns about a potential U.S. economic recession, the non-residential construction market remains promising. Exceeding $1 trillion in expenditures, non-residential construction anticipates sustained growth. Aging manufacturing assets needing replacement and modernization, combined with reshoring efforts, are driving growth. Government-driven infrastructure spending is poised to inject up to $2 trillion over the next decade, spanning roads, health care facilities, energy, power, utilities and warehouses, along with mega projects. This positive outlook elevates demand for equipment rental, positioning Ashtead as a key player.
Strong indicators drive optimism
Leading indicators in the U.S. construction market support optimistic forecasts. The Dodge Momentum Index, reflecting non-residential building projects in the planning stage, exhibits strength with a 21% year-over-year increase. Notably, institutional projects, backed by government funding, report a 35% increase, boding well for Ashtead's profitability. The Associated Builders and Contractors construction backlog data reinforces robust construction demand, reflecting strong pent-up demand.
Market evolution and Ashtead's role
Leading players like Ashtead and United Rentals are expected to continue expanding their market share. Over the past decade, these companies have significantly increased their shares, reflecting industry consolidation. Smaller independent companies control about 37% of the U.S. market and are likely to face challenges due to limited resources. This predicament may prompt acquisition by industry giants. Ashtead Group envisions a market where two or three companies dominate at least half of the US market.
Valuable integration and pricing stability
Ashtead's ability to integrate acquisitions into cluster locations, optimizing customer service and profit margins, contributes to its success. Amid concerns of oversupply, both Ashtead and United Rentals affirm a balanced demand-supply scenario and adherence to pricing discipline. Additionally, the ability to pass on inflation-induced cost increases and maintain young fleets further solidifies stability.
Attractive valuations and future outlook
Considering short-term and long-term prospects, Ashtead's valuation appears compelling. Its forward price-earnings ratio has declined over the past three years, positioning shares as a value-driven option. The company's strong business model and growth potential, coupled with sustained government spending on infrastructure, mitigate risks. Ashtead's fundamentals and strategic direction position it as an enticing investment avenue.
The stock is rated modestly undervalued by the GF Value based on its historical ratios, past financial performance and analyts' future earnings projections. The company has a decent Piotroski F-Score of 7 our of 9 and a reasonable Altman Z-Score of 2.94.
Further, the company has a very strong GF Score of 94, which indicates high outperformance potential.
In conclusion
Ashtead's significance in the equipment rental landscape stems from its role as a vital partner to non-residential construction entities across the U.K., U.S. and Canada. A diversified equipment catalogue, strategic investments, transparent financial metrics and a robust position in the evolving U.S. market characterize Ashtead's journey. The company's adeptness in navigating industry cycles, integrating acquisitions and capitalizing on demand dynamics showcase its agility. As investors assess its potential, the company's fundamentals and forward-looking strategies underscore its status as an attractive investment prospect within the equipment rental sector.
