There is something seriously amiss about a company’s strategy when its share price slumps 8 per cent largely because of a long-settled strike by strolling players and scribblers on Hollywood’s sun-soaked sidewalks. The shares have been a battleground between bulls and bears for the past 18 months, and this has been, hands down, the bears’ week.
On the face of it, results for the third quarter ending on January 31 were not too shabby. Revenue was up 9 per cent at $2.65 billion, taking ebitda (earnings before interest, tax, depreciation and amortisation) up 7 per cent to $1.17 billion. However, those gains were south of the comparable improvements for the first nine months, which came in at 14 per cent and 12 per cent respectively. And a glance further down the profit and loss account is less pretty, showing 11 per cent declines for adjusted profit before tax and earnings per share in the three months, compared with flat outcomes in those categories over the nine months.
Ashtead does not break out how much of its revenue comes from film studios, but the US is its lifeblood, with three-month revenue up 7.6 per cent at $2.04 billion. Much of that is spread around the east and west coasts, stretching as far north as Alaska and as far west as Hawaii, helping the construction, exhibition, rescue and other industries to, as it says, “lift, power, generate, move, dig, compact, drill, support, scrub, pump, direct, heat and ventilate”.
All the odder, then, that one strike that ended halfway through the third quarter should have such an adverse impact, although it does seem to have taken the Los Angeles studios a puzzling amount of time to return to full-speed production. Studios in Canada and the UK, Ashtead’s two other territories, were also affected. The absence of hurricanes and wildfires to the extent they ravaged the US in the previous winter also gave the firm less to do.
The company, not to be confused with the Aberdeen-based Ashtead Technology, which rents underwater equipment to the oil industry, finds it almost impossible to shake off the cyclical nature of its fortunes, try as it might to do so. Companies rent equipment at the start and end of the business cycle, often feeling sufficiently confident to buy outright in the full tide of an economic boom.
JP Morgan Cazenove, an Ashtead fan, says: “A combination of structural changes and management actions has driven an evolution in the business model and created a more sustainable equity investment, something we believe the market does not appreciate.”
In the nine months under review, the group invested $3.5 billion in capital across existing locations and greenfields and $906 million on 26 bolt-on acquisitions, adding a combined 106 locations in North America alone. The chief executive, Brendan Horgan, told this week’s earnings call: “The M&A pipeline from a bolt-on perspective is massive. There remain thousands and thousands of independent rental operators out there who are increasingly looking for options as it gets harder to compete against us.” It is surprising that Horgan has set his face against exploring other countries, most obviously in Europe.
There is considerable scope for expansion. The world is becoming more mechanised, and the group is only the second biggest in the US, behind United Rentals. There are plenty of family-run rental firms dotted around America, especially in areas Ashtead does not currently touch, mainly in the midwest.
A new strategy is due to be unveiled next month, but meanwhile, Horgan has scaled back his forecast of 11-13 per cent revenue to the low end of that range. That may translate to a 6 per cent rise in pre-tax profit.
JP Morgan hopes the shares will re-rate through the year as investors become more convinced of the earnings trajectory. The latest hiccup will do little to convince investors that Ashtead has shaken off its cyclical label, however the cycle could be about to turn. Interest rates are falling and the US is likely to be primed ahead of November’s presidential election. But a 19 p/e ratio and 1.4 per cent yield are not cheap.
Advice Hold
Why? Uncertainties will drag on the share price
Intertek Group
No one likes being told they are doing something wrong but businesses know how important it is to have an independent voice pointing out missteps or, hopefully, saying how well they are faring. Intertek works in 1,000 laboratories across 100 countries, giving or withholding approval of a wide range of goods and services from toys to the fuel pumped into the US president’s plane. As the company says, there is no hiding place.
Revenues last year rose £135.8 million, or 4.3 per cent, to £3.3 billion, partly boosted by companies taken over during the period. Operating profit was 6.1 per cent higher at £551.1 million to give a profit margin of 16.6 per cent. Earnings per share rose 5.6 per cent from 211.1p to 223p, paving the way for the same percentage increase in the annual dividend, from 105.8p to 111.7p.
The business has five divisions: consumer goods, commercial & electrical, commodities (including minerals), chemicals & pharmaceuticals, and industry & assurance. Consumer is the biggest, accounting for £935.8 million revenue in 2023.
The consumer division has been a reliable pillar through the recent choppy economic environment, since many countries understandably have legislation requiring manufacturers to show their food, clothing and other products are safe and fit for purpose.
There is concern about the ability of competitors to nibble at Intertek’s market share but the company is confident the skills and experience required will be enough of a barrier in the medium term at least.
As the global economy turns a corner, more companies will feel they can not only afford Intertek’s discretionary services but also ought to have them, and Intertek can respond by nudging prices higher. Analysts concur with the management that about 6 per cent annual growth is sustainable.
The p/e ratio on this year’s expected profits is a fairly demanding 19.8, but a yield of 3 per cent and growing gives a worthwhile cushion.
Advice Buy
Why? Should benefit from economic upturn
