Shares in rental specialists United Rentals and Ashtead, who hire everything from saws to bulldozers, have been glued together for the past three years (see chart) - not surprising as both their fortunes are closely tied to the US economy. But since May something significant has happened - their share prices have parted company. Ashtead reported record trading in its first quarter to the end of July, while United Rentals announced that second-half revenues would miss market expectations. As a result, United's shares sunk while Ashtead's hit record highs. Yet the worry is that the softer outlook for the second half, which has already hit United, also spells trouble for Ashtead. So, after a record run, it's time to take profits and sell Ashtead.
- Trading currently sound
- Capital spending programme
- Record high share price
- Ominous fall in US rival's shares
- No US stimulus
Even though their headquarters are 3,500 miles apart, United Rentals and Ashtead are sector peers because Ashtead's US arm, Sunbelt, generated 84 per cent, or £945m, of 2011-12 group revenue. More significantly, all of the group's £181m operating profits came from the US. The UK arm, A-Plant, generated revenues of £189m and operating profits of just £7m.
So, when the share prices of these two all-but-identical companies started diverging, as they did recently, it's significant. Sure, some of United Rentals' investors are selling because a $2.53bn deal to buy rival RSC, which closed in April, included taking on a whopping $2.3bn in debt. And if over $200m in cost savings fail to materialise, profits may unravel, too. But that deal was announced in December so investors have had plenty of opportunity to get out. Besides, initially it prompted the share price to rise over 60 per cent to $44 by May.
ASHTEAD (AHT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 314p | MARKET VALUE: | £1.58bn | |
| TOUCH: | 314-314.5p | 12-MONTH HIGH: | 318p | LOW: 116p |
| DIVIDEND YIELD: | 1.2% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 104p | NET DEBT: | 171% | |
| Year to 30 Apr | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 0.84 | 4.8 | 0.4 | 2.90 |
| 2011 | 0.95 | 1.7 | 0.2 | 3.00 |
| 2012 | 1.13 | 135 | 17.8 | 3.50 |
| 2013* | 1.26 | 164 | 21.1 | 3.68 |
| 2014* | 1.41 | 189 | 24.3 | 3.86 |
| % change | +12 | +15 | +15 | +5 |
Normal market size: 10,000 Matched bargain trading Beta: 1.5 *JPMorgan Cazenove forecasts (earnings are not comparable with historic figures) | ||||
More worrying is that in July United's bosses said that revenue in the second half would miss Wall Street's targets, although they still expected to beat forecasts for cash profits. Street analysts felt they released these new numbers, which had not been provided in the second-quarter trading update, to calm the markets. They did anything but. From the May's high point, United's share price has slumped 31 per cent.
Ashtead, in stark contrast, saw its share price jump another 10 per cent after it reported strong first-quarter trading, with revenue up 21 per cent and underlying pre-tax profit rising 38 per cent to £61m. Chief executive Geoff Drabble says he expects full-year results to beat expectations. Management also increased capital spending in the first quarter to £223m, compared with £156m a year earlier, with the aim of spending about £450m on new plant for the whole year. Yet first-quarter results were more muted. Underlying pre-tax profits rose strongly, from £34m to £61m, but the reported figure saw profits up from £33.1m to just £34.9m after taking a £26.5m one-off hit related to refinancing.
