The Investment Column: Ashtead worth holding for promise of American riches

JD Wetherspoon; Tate & Lyle
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The Independent Online

Our view: Hold

Share price: 155.75p (+8.5p)

Ashtead yesterday unveiled the details of its $1bn (£540m) acquisition of its US rival NationsRent. The deal creates the third-biggest tool hire company across the Atlantic with a market share of about 5 per cent. Given the fragmented nature of this industry, readers should not be surprised to see Ashtead make further acquisitions as it plays the role of sector consolidator.

The purchase of Nations-Rent, which hires out equipment such as forklift trucks and ladders and pumps to builders, will be funded by a £150m three-for-eight rights issue priced at 100p. It leaves Ashtead in a position whereby it generates more than 80 per cent of its revenues from the US.

Although on the surface worries about the state of the world's largest economy - it is struggling under a record trade deficit and oil price - make Ashtead's deal look risky, its management team, led by chief executive George Burnett, are convinced that the long-term fundamentals of the US are sound. They point out that just 6 per cent of Ashtead's clients are involved in the country's housing market, which has boomed in recent years but is expected to suffer a slowdown. The bulk of the contractors who use its equipment are involved in government infrastructure projects, including the building of schools, hospitals and roads, and industrial sectors (making factories and warehouses).

As long as the US economy avoids a major recession, Ashtead should do well. Its growth will be driven by a trend which sees contractors increasingly give up owning tools and instead hire them from companies like NationsRent. At present 38 per cent of US builders rent their tools. This figure is expected to rise to 50 per cent by 2010.

Clearly yesterday's acquisition will significantly add to Ashtead's debt burden but investors need not be concerned - the company can easily afford it. The amount of cash it generates in a year should be able to service its interest bill four times over. With the group's acquisition tipped to generate cost savings of £20m per year and forecast to start to enhance profits significantly from 2008, its shares, which trade at 11 times forward earnings, are worth holding on to.

JD Wetherspoon

Our view: Hold

Share price: 429.5p (+10.5p)

JD Wetherspoon confounded its critics in the City yesterday by issuing a bullish trading statement ahead of its year end. The pubs group said that like-for-like sales in the 12 weeks to 16 July had risen 5.1 per cent, thanks in part to the record-breaking temperatures across the UK.

According to its management, the heat has had more of an impact on business than the World Cup. Of course, had it decided not to show the football across its 650 pubs, as has happened in the past, sales would have undoubtedly suffered. As far as the weather is concerned, Wetherspoon says punters are more likely to pop in to one of its pubs for a beer after work if it is hot outside.

The strong sales the group has enjoyed mean that its full year results, due in September, will come in at the top end of analysts' expectations. The question now for investors is whether this marks the start of a turnaround at Wetherspoon. The answer is that although profits this year are expected to rise to around £55m from £47m it is still too early to say whether a sustained recovery is on the cards.

At current levels, its shares are by no means cheap. They trade at more than 21 times forward earnings which is a substantial premium to its rivals. Greene King and Enterprise Inns are valued at around 13 times. Nevertheless, supporting the stock is the company's impressive cashflows. Analysts estimate Wetherspoon has a cashflow yield of around 7.5 per cent. This makes its stock worth holding on to.

Tate & Lyle

Our view: Buy

Share price: 647p (+18p)

Tate & Lyle has made a strong start to its financial year. Yesterday the sugars and sweeteners group said its first-quarter results were well ahead of last year's. This performance has been mainly thanks to continuing strength at the group's Food & Industrial Ingredients Americas business and from sugar trading.

Tate & Lyle's long-term growth story is very much intact. Brokers believe the group is on course to deliver comfortable profit growth in every one of the next seven years irrespective of any negative impact on earnings as a result of the planned reform of the European Union's sugar regime.

As it stands, the City expects Tate & Lyle profits to rise to £325m for the year to March 2007 from £42m previously. Such is the strength of its cashflows, it finds itself in the position of being able to easily fund investment projects and acquisitions while still paying attractive dividends. Given the predicted earnings growth, the stock, on a rating of 13.5 times earnings and yielding 3 per cent, should be bought.

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