Ashtead Group (LSE: AHT) is the best-performing FTSE 100 stock over the past 20 years. In that time, it’s produced a mind-boggling total return of 21,934%, according to calculations from AJ Bell. Across 10 years the returns have also been stellar, turning £5,000 into £65,000!
What has driven these extraordinary gains? And am I too late to buy the stock?
Boringly brilliant
Ashtead is a tool hire company that rents out a range of construction, industrial and general equipment. These include things such as aerial lifts, hand-held tools and forklifts. It has 1,265 rental stores in the UK and North America.
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The firm continually reinvests in its business to expand and maintain its pool of equipment. It has taken market share through both organic growth and a steady stream of mergers and acquisitions. The company trades under the name Sunbelt Rentals and now has 12% of the US tool rental market.
This is actually more impressive than it sounds, as the market is extremely fragmented. United Rentals (the world’s largest equipment hire company) only has a 16% market share in the US.
This indicates that there’s plenty of room for further consolidation. And the company has been busy on that front, spending $1.3bn on 25 bolt-on acquisitions in fiscal 2022 (ended April 30).
This was after spending $172m in fiscal 2021. And in its recent first quarter, it revealed another 12 bolt-on acquisitions in the space of just three months. Ashtead is moving aggressively to consolidate the market and cement its competitive position.
Recession fears
The company derives nearly 90% of its revenue from North America, which isn’t surprising given the size of the US construction market. The rest comes from the UK, where it’s the largest equipment rental company, and Canada, where it has an 8% market share.
Full-year 2022 revenue was up 18% to $7.96bn, while net profit climbed 35% to $1.25bn. Five years ago, those figures were $4.1bn and $646m, respectively. When it formed in the south-east of England in 1984, it posted revenue of £1m.
Yet despite reporting strong results, the stock is down 17% over the last year.
Why? Well, clearly the prospect of a US recession is hanging over it. Construction spending tends to track the wider economy, so a severe economic downturn could cause some share price volatility.
Will I buy the stock?
Despite the excellent performance of the company (and stock), I’ve never invested in it. However, Ashtead’s recent display of pricing power has caught my attention. It has successfully passed on much of its inflationary costs to its customers, thereby protecting its healthy 24% operating margin. And it has done this (so far) while staying competitive.
I expect the company to continue acquiring smaller peers to gain further market share in the US and Canada. And there could be expansion into further geographic regions down the line.
The stock doesn’t appear overly expensive, with a forward price-to-earnings (P/E) ratio of 16. It also pays a dividend, albeit not a spectacular one, with a yield of 1.3%. Still, I’d also expect the payouts to grow long term, given the cash flows the firm generates.
All in all, I’m convinced enough to start a position in the stock .
