Ashtead’s star status dented by Hollywood strikes

“It may seem unfair to drive a share price down by more than 10% when the profit forecast downgrade is only 2% to 3%, but investors do not seem to be in a forgiving mood when it comes to Ashtead’s less optimistic trading outlook”, says AJ Bell investment director Russ Mould.

“In many ways, the equipment hire specialist is a victim of its own success. Shareholders have enjoyed a string of upgrades to earnings estimates in the past couple of years, so even this very mild disappointment has come as a considerable shock.

“After a softer-than-expected end to Ashtead’s second quarter, management is shaving down its rental revenue growth forecasts for the USA to 11% to 13% for the year to April 2024, from prior guidance of 13% to 16%. As a result, expectations for the group-wide numbers are changing by the same degree – the American operations represented 85% of total sales in the first quarter of the year.

“The US also generated 90% of profits in the first three months of fiscal 2023-24 and as a result chief executive Brendan Horgan and team are now shaving 2% to 3% off earnings forecasts for the year, based on the metric of earnings before interest, tax, depreciation and amortisation (or EBITDA).

“Before the surprise announcement, analysts had been looking for $5.2 billion of EBITDA in fiscal 2024, up 17% from $4.4 billion in the twelve months to fiscal 2023. A figure nearer to $5 billion now seems more accurate, given the revised outlook.

Source: Company accounts, Marketscreener, management’s revised guidance for 2024E

“That implies full-year growth in that particular (non-statutory) profit metric of 14%, which is still impressive. However, it does suggest a slowdown from the much more rapid rate of progress seen in the first quarter and this may be why investors are fretting, even if Ashtead is stressing that the modest downgrade is the result lower demand thanks to the strikes in Hollywood and a quiet hurricane season in the USA.

“In the first quarter of fiscal 2023-24, sales grew by 19% and EBITDA by 18%.

Source: Company accounts

“Projects relating to the CHIPS and Inflation Reduction Acts are contributing strongly to growth in Ashtead’s US business, and such governmental largesse may be one reason why America’s economy continues to defy the doubters.

“In this respect, it is tempting to see Ashtead’s trading alert as a blip.

“But the US deficit is growing at an alarming rate even when the economy is also growing and any unexpected slowdown would presumably hit the tax take and increase welfare spending to make a difficult situation much worse.

“As it is, Ashtead’s shares failed to recapture their 2021 highs, even after fiscal 2023’s string of forecast upgrades and even though stock and bond markets have done their best to convince themselves that a soft landing is coming to the US and global economies.

“Yet surveys such as the purchasing managers’ indices from the Institute for Supply Management paint a less cheery picture. The overall reading for October and the new orders sub-index came in below 50, the mark which is traditionally seen as acting as the dividing line between expectations for future growth (above 50) or a future slowdown or recession (below 50).

Source: LSEG Datastream, US Institute of Supply Management

Source: LSEG Datastream, US Institute of Supply Management

“Another key end-market for Ashtead is housing and the American market is hardly flying, if the monthly NAHB housebuilders’ survey is any guide, and any prolonged period of cool or weak activity here could conceivably take a further toll on Ashtead’s sales and profit outlooks, as well as its share price.

“If nothing else, the FTSE 100 firm could be a useful litmus test for the ‘soft landing’ scenario going forward and thus be a helpful barometer for wider financial market health.”

Source: LSEG Datastream, US National Association of Housebuilders (NAHB)

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