Ashtead powers higher but investors must be wary of the broken window fallacy

Shares in Ashtead are up sharply after the equipment rental expert issued an upbeat first-quarter trading update and floated the prospect of a boost to future business from America’s efforts to clean up after the devastation wrought by Hurricanes Irma and Harvey.

Temporary power equipment supplier Aggreko is also up a touch as shareholders ponder the potential boost to its business, which would be welcome indeed after the company’s woes in Argentina, even if Aggreko only draws 22% of its sales from the USA, compared to 90% at Ashtead.

“Ashtead unveiled a 16% increase in sales, 19% jump in pre-tax profits and 20% advance in earnings per share (on a statutory basis), firmly underpinning the consensus analysts’ forecast growth rates for the full year of 12%, 17% and 14% respectively (see chart below)," says AJ Bell Investment Director Russ Mould.

“But investors should be wary of assuming that the recovery operations in Houston, Florida and the southern States of America will lead to a substantial boost to US GDP and overall economic output.

“This is what’s known as the Broken Window Fallacy, after a treatise written by the nineteenth-century French economist Frédéric Bastiat.

“Bastiat outlined a situation whereby a baker’s son accidentally broke a pane of glass, which he has to repair. Passers-by console him by saying he is keeping the glazier in business.

“Bastiat accepts that this is good for the glazier but also argues that it should not be seen as generating overall economic growth (otherwise it would make sense for everyone to go around simply breaking windows, or anything else for that matter, so it has to be replaced).

“This is because the baker cannot spend that money on his business (to expand it) or shoes or books or food, so while the glazier gains someone else loses out. Moreover, society does not make a net gain as more labour and materials have been expended simply to replace what was already there – and this is a reason why the baker is definitely worse off, as he has had to spend money to get back to where he was initially (a shop with a window).

“Encouraged by today’s perfectly healthy Ashtead statement, there has to be a chance that economists and analysts start to trumpet the prospect of faster short-term American growth, as the USA repairs the damage. And GDP numbers may accelerate from their relatively lowly base.

“But it would be a mistake to use this and this alone as a justification for taking US stocks indices to fresh all-time highs, as not all sectors, industries or companies will benefit and the economy only truly does sustainably well when people have to work less to achieve the same (or a higher) level of wealth of consumption – in other words productivity improves.”


Source: Company accounts, Digital Look, analysts' consensus estimates. Year to April.

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