In my last column, I discussed how estimate revisions can be a valuable element of the research process and can help identify companies whose prospects are improving. I used Ashtead (AHT) as an example as it had seen a pretty spectacular share price performance, partly on the back of positive estimate revisions and partly as a principal beneficiary of the theme of increased infrastructure spending in the US.
When I was a hedge fund analyst, I worked for global funds which in one sense was a major advantage but also brought its own constraints. If you have the luxury of investing globally, you can of course trawl a wider field for interesting ideas – I much preferred that flexibility. But there is additional work to identify the best possible global vehicle to play a particular theme.
I once interviewed well-known US investor Mario Gabelli and he described how he started investing globally in the late 1980s; this was very early and there were very few firms operating on a global basis then. Such investing is much more widespread today and I believe it will continue to grow in popularity because it gives the practitioner a major advantage.
Just how much of an advantage was shown to me when one of my best brokers called me about a European stock to tell me that there were issues at its Chinese competitor and that I should therefore think about a short. I already knew this because I had been following the Chinese competitor. In today’s more globalised world, this edge is more difficult to achieve, but you can still gain an advantage.
A major element is the ability to do cross-border comparisons when looking at a stock. Gabelli told me about one of his big winners, Herc (US:HRI), the equipment rental business formerly a part of Hertz but now spun off and with its own float. Gabelli had participated in the original issue, built up a large stake and had made three times his money.
Coincidentally, Herc happens to be a competitor of Ashtead, so I wanted to show you these comparisons in practice. Ashtead is effectively a US company quoted in London, as by far the majority of its business is in the US. In my analysis, it’s always useful to look at comparatives, particularly when looking at a stock like this whose domicile is dislocated from its operations. Although the primary focus of these comparisons is to look at relative valuations, there can be many facets of such analysis.
First, looking at the share price performance, Ashtead has performed similarly to its US peers, as you can see from the chart below. This is indexed from the listing of Herc, the former equipment rental arm of Hertz:
So Ashtead’s performance, while much better than the UK sector, is consistent with its peer group, and particularly United Rentals (US:URI), although note that the latter has seen its price roll over somewhat more recently. Looking at valuation multiples gives an even more interesting picture:
Ashtead’s share price has performed similarly to United Rentals, but it has seen a greater multiple expansion and is now rated significantly more highly on EV/Ebitda multiples. This is really quite unusual as normally US stocks are rated more highly than those in London. This could reflect scarcity value – there are naturally more stocks with exposure to the US infrastructure spending theme in the US and fewer in London. Although that scarcity value may continue, the fact that United Rentals is more lowly rated and Herc is rated more cheaply still warrants further investigation.
Many UK investors prefer to stick to the UK market because they feel it’s somewhere they know, they don’t have to worry about higher trading and similar charges and they don’t have currency risk. These investors are missing a trick. They are probably right in the local knowledge – they have an advantage with UK stocks because as they are closer to home they may have a better network of contacts and information and they can read about them in the UK press. This is less true of a stock such as Ashtead which is a largely US domestic business and driven by US economic factors.
The concerns about potentially higher charges is less of an issue – you can trade for free in the US. Although free trading is not always available to a foreign investor, charges should be as low, or possibly lower, than in the UK. And the currency concern is misplaced – Ashtead is effectively a dollar stock and, while its share price may be quoted in Sterling, it will move with the dollar – if the dollar goes down, Ashtead’s earnings will be worth fewer pounds. And I believe that there is limited risk in betting against sterling in the long term as it has tended to be a weak currency over the long term – I prefer to have a mix of currency exposures in my portfolio.
I have not conducted any detailed research on Herc or United Rentals – Ashtead may well be a much better company – but my initial review, looking at a single parameter, suggests that its peers warrant closer consideration. The fact that Ashtead has performed in line with United Rentals, in spite of being much more highly rated, suggests that United Rentals may have had a similar profits growth trend but has not enjoyed the same rerating.
I would suggest that anyone who is thinking of investing in Ashtead or indeed owns the share, ought to at least look at its sector peers. If Ashtead is a better company, will it grow more quickly? At time of writing, Ashtead has a market capitalisation of £24bn/$34bn and an enterprise value (EV) of £28bn/$40bn, according to Sentieo. The same data for United Rentals were $24bn and $34bn and for Herc just $3.7bn and $5.2bn. Ashtead may have more financial firepower but its peers may have more room to expand and Herc could even be an attractive target.
But I am getting ahead of myself – my next steps in this analysis would be to widen the comparison and to look at some other valuation parameters. I generally start with EV/Ebitda or EV/Ebit because when making an international comparison, I want to isolate the impact of differences in tax rates and debt structures. Doing the comparison on an EV/Ebitda basis, as I have done here, is popular and also isolates differences in depreciation policies. But equipment rental is a capital-intensive business, and an EV/Ebitda comparison takes no account of the debt required to finance the assets nor of the asset intensity – there are two critical parameters in such businesses. I would do this as a next step and also examine the relative profit growth over time. I shall return to these topics in a future column.