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Is this little-known company the best growth stock in the FTSE 350?

Person holding magnifying glass over important document, reading the small print
Image source: Getty Images

The most-traded stocks in the FTSE 350 tend to be well-known firms — Lloyds, for example, or BT. They might also be shares in companies with a bit of sex appeal, like Rolls-Royce.

Footsie constituent Ashtead Group (LSE: AHT) is neither, it would be fair to say.

But over the past 10 years, this unassuming company has seen its share price increase sevenfold. And in the past five years alone it has quadrupled.

I bought it within that latter period, and now that its shares have dipped, I am planning on buying more.

No one likes us, we don’t care

I have always felt that rather like the redoubtable fans of Millwall Football Club, Ashtead management doesn’t care too much if no one likes them.

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I like that. It means to me that they just get on with massively growing the business year in, year out, with no distractions.

And the business is just renting out equipment to other companies. As it says on its website: “Our equipment can be used to lift, power, generate, move, dig, compact, drill, support, scrub, pump, direct, heat and ventilate”. So there we are.

This said, it is the second largest equipment rental company in the US, operating under its Sunbelt Rentals brand. This business accounts for 86% of its global revenue.

It is also the largest such firm in the UK and has a 9% share of the market in Canada.

However, its presence in the US has seen it benefit from enormous growth in construction megaprojects nationwide. Currently, around 33% of total US non-residential construction starts are $400m+ projects, compared to just 13% in 2000-2009.

The US’s $430bn Inflation Reduction Act and $52bn CHIPS Act fuelled this boom further. And it is cheaper and faster for a business to rent the necessary equipment than to buy it.

There are a couple of risks I see in the stock. Green energy projects is the focus of some of this new construction work. Opposition from the US’s powerful oil lobby could threaten some of these.

Another is that the construction market is cyclical and typically lags the general economic cycle by 12-24 months. So it may not yet have felt the full impact of recent high inflation and interest rates in the US.

However, its unaudited results for Q2 2023 released on 5 December showed revenue up 13% on Q2 2022 – to $2.9bn. And operating profit increased 7% over the same period – to $799m.

Is there any value left in the shares?

Ashtead currently trades on the key price-to-earnings (P/E) ratio measurement at 18.3, against a peer group average of 19.1.

This comprises Herc Holdings (12.5), United Rentals (18.8), Bunzl (20.3), and Home Depot (24.7).

A discounted cash flow analysis shows the stock to be around 33% undervalued, even after the decade-long rise. Therefore, a fair value would be around £82.34 a share, against the current £55.17.

This does not necessarily mean it will ever reach that price, of course. But it does highlight to me that it is very good value.

Given this, and my view that it remains one of the best growth stocks in the FTSE 100, I will be adding to my holding in the company very soon.

The post Is this little-known company the best growth stock in the FTSE 350? appeared first on The Motley Fool UK.

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Simon Watkins has positions in Ashtead Group Plc and Lloyds Banking Group Plc. The Motley Fool UK has recommended Bunzl Plc, Lloyds Banking Group Plc, and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024