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Ashtead's (LSE: AHT) is one of my favourites FTSE 100 shares. Over time, the construction equipment rental company has generated an incredible amount of wealth for its investors (it has increased 100-fold in the last 20 years).
Last week, Ashtead received a new offer to buy from a City broker. Here's a look at the details and target price.
A higher price target
The dealer I am referring to is Berenberg. On Tuesday (19 September), it announced that it had started covering Ashtead shares in a buy position. Its target price for Footsie stock is 7,000p, which is almost 23% above the current share price.
Berenberg analysts believe that in the long term, Ashtead – which generates most of its revenue in the US these days – is well placed to take market share and take advantage of opportunities such as large-scale projects and data center construction. Analysts also expect Ashtead's profits to increase in the medium term.
I have strength
Now, I completely agree with Berenberg's investing thesis. I have been admiring the power of this company for the past year. Since the US is currently in the midst of a major multi-year construction boom (infrastructure, data centers, semiconductor plants, offshore factories, etc), I think Ashtead is well positioned for growth in the coming years.
But there is another reason why I like the look of this stock today. And that is that interest rates are going down. You see, Ashtead has a good amount of debt on its balance sheet (which adds to the risk). And this has cost servicing at higher rates.
With the US Federal Reserve cutting rates by 50 basis points last week, things are looking up for Ashtead. Lower rates should lead to lower interest costs, which should, in turn, lead to higher levels of profits (and a higher share price).
A logical approximation
As for the company's valuation, I think it's quite reasonable. With analysts expecting earnings per share of $3.96 this fiscal year (ending April 30, 2025) and $4.55 next, the P/E ratio is 19.2, down from 16.7.
At those multiples, I think the stock is capable of delivering attractive returns in the coming years. A dividend yield of around 1.5% will help here.
Expect flexibility
Now, another challenge with this stock is that it is volatile. Whenever there is a shock to economic growth, it tends to slide (because the construction sector is a cyclical industry that is vulnerable to economic downturns). So it's probably not the best stock for those looking for stability within their investment portfolios.
However, for those with a long-term investment horizon who are comfortable with less volatility (like me), I think it's worth considering. I think there is a good chance that it will outperform the FTSE 100 index in the next five years given the US backdrop.
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