By Al Root

Ashtead Group has fallen on hard times. But a pickup in industrial activity -- combined with a change of scenery -- makes the stock look like a buy.

A little-known renter of construction equipment, Ashtead picked a bad week to release disappointing earnings. It missed both earnings and revenue estimates, and cut its Canadian growth forecast even as it left its full-year guidance intact. Any other day, the company might have suffered a small loss, but Ashtead released its results after the close on March 3, just as tariffs on Canada and Mexico were initiated, adding to fears of a slowing U.S. economy. Ashtead's London shares fell 8.2%, to 44.04 pounds sterling, their lowest since October 2022.

But there's a lot to like about Ashtead stock -- especially if current growth fears recede. The company isn't a household name, but with more than 1,200 U.S. locations in all 50 states, its green-painted Sunbelt equipment is a familiar sight on construction sites across the country. Ashtead has spent recent years digesting a spate of acquisitions and upgrading systems, and is now focused on Sunbelt 4.0, its strategy to accelerate growth. As a London-based company that does the vast majority of its business in North America, Ashtead also plans to buy back $1.5 billion of shares and move its listing to the U.S., which should provide another boost for the stock. Recent weakness presents a buying opportunity for investors willing to bet on a turnaround.

"This midcycle wobble in stock price performance potentially represents an attractive entry point," writes RBC analyst Karl Green, who believes that construction activity will pick up during the second half of 2025.

The wobble hasn't been easy for Ashtead, the second-largest renter of construction equipment in the U.S. behind United Rentals. With just 26% of the rental business between them, there's a lot of market share to capture with acquisitions. Ashtead just about doubled its business from $5.4 billion in revenue to $10.6 billion in 2018 to 2023, helping push the stock up some 250% over that span. With no significant acquisitions to boost sales in 2024, and small construction and residential markets hit by high interest rates, the stock is down 15% since the start of last year.

The company also needed time to digest prior deals -- more than a dozen since 2017 -- and upgrade its internal systems, says Melius Research analyst Rob Wertheimer, but investors can expect growth to accelerate. "It's a transitional moment in a well-run company with lots of upside," he says.

The listing change, which was announced in December, could be a big deal. Ashtead trades in London even though about 85% of its sales come from the U.S. and more than 90% are generated in North America. That's a problem. U.S. investors don't recognize it as the American company it is, and United Kingdom companies trade at a discount to U.S. ones.

That's why Ashtead trades at 14.1 times 12-month forward earnings, a slight premium to United Rental's 13.4 times, despite targeting 45% revenue growth from 2024 to 2028, about double its rival's expected growth rate. The move should also help the company attract top talent via broader stock ownership, gain access to what it calls "deeper" U.S. capital markets, and become eligible for inclusion in U.S. stock indexes.

The difference in listing venue can be material. After moving primary listings to the U.S., construction materials and services company CRH gained 71% during the 12 months following the change in September 2023, while plumbing supplies distributor Ferguson Enterprises rose 20% and saw its price/earnings ratio rise to 17 times today from 13 times in May 2022. Based on growth rates and industry exposure, it's easy to see Ashtead trading at about 17 times estimated 2026 earnings, up from the current 14 times. That alone could boost shares some 20%.

The process -- which requires a shareholder vote -- will play out early next year. But improving business fundamentals are enough for Wertheimer. Just the fact that companies prefer to rent equipment rather than buy has been good news for Ashtead, United Rentals, and others. The total North American rental market grew from $57 billion in 2018 to roughly $78 billion in 2024. Machinery rental companies are "basically growth retailers...making huge store-level economics," he says.

What's more, the U.S.'s industrial economy appears to be starting back up after a brutal two-year decline. On Monday, the Institute for Supply Management Manufacturing Purchasing Managers' Index, or PMI, registered a reading above 50 -- the level that indicates growth -- for the second consecutive month, after sitting below 50 for 25 of the 26 months heading into 2025. What's more, electrical components maker Eaton says there was a backlog of $1.9 trillion in North American "megaprojects," or construction projects with budgets north or $1 billion, as of the end of 2024. Ground has been broken on just 15% of them, and Eaton is expecting a record number of starts in 2025. But real improvement will come from Ashtead's Sunbelt 4.0 strategy, launched in April 2024, which aims to accelerate growth by improving same-store sales and pricing while adding to tool and specialty offerings. The company is targeting some $14 billion in annual revenue by calendar-year 2028, up from about $11 billion generated in 2024. Earnings before interest, taxes, depreciation, and amortization, or Ebitda, are targeted at about $7.5 billion, up from $5 billion over the past 12 months.

The plan follows Sunbelt 3.0, which was launched in April 2021 and expanded the company's footprint by 394 locations. From 2021 to 2024, Ashtead sales grew about 70%, while Ebitda expanded 55%. That kind of performance -- and the potential for 4.0 -- just isn't baked into Wall Street estimates yet.

Ashtead will have to navigate higher interest rates, which could limit building activity, and a potential slowdown in the U.S. amid President Donald Trump's on-again/off-again tariffs. If all plays out well, however, Wertheimer sees shares trading at about 21 times his fiscal-year 2026 earnings estimate of GBP3.26, for a price target of GBP69, up 52% from Wednesday's close of GBP45.26.

If the U.S. keeps building, Ashtead gains will come.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 06, 2025 01:00 ET (06:00 GMT)

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