Investment Column: Poor numbers don't give Ashtead its credit
Balfour Beatty; Consort Medical
Friday 18 June 2010
Our view: Buy
Share price: 110.2p (-3.5p)
The headline figures in Ashtead's full-year results were plainly uninspiring. The equipment hire company posted a 95 per cent decline in underlying profits before tax, while underlying revenues were down 25 per cent.
That said, the update was not quite as bad as some analysts had expected. Moreover, Ashtead has not been sitting around twiddling its thumbs; it has used the downturn to increase its market share, leaving it well placed to capitalise on the upturn – and this is where it gets interesting.
The company said market conditions appeared to be on the mend in the three months to the end of April. Its US market, in particular, showed signs of recovery, with leading indicators firming up. That bodes well for the future. Put the increased market share and the signs of recovery together and the headline figures begin to fade from the memory.
Those of a more bearish disposition might point to the UK, where the medium-term economic picture remains uncertain because of the looming fiscal squeeze. But the fact is that the storm clouds will eventually clear, and when they do, Ashtead will be in a strong position to make gains.
In the meantime, sales in America should help Ashtead to remain ahead of its peers. As it is, Ashtead has begun reinvesting in its fleet, funding the programme from operating cashflow. This should underpin gains in its US business, which is the focus of the reinvestment programme.
Promising stories like this are often undone by the valuation, but again, Ashtead's shares are not expensive. As UBS points out, on a mid-cycle basis, discounting back from estimates for 2013, the shares end up a on multiple of 4.2 times in terms of enterprise value to Ebitda. That compares favourably to usual mid-cycle metrics of 4.5 to 6 times. We think its worth investing in Ashtead now, before the recovery spreads its roots and the market re-rates the shares. Buy.
Our view: Hold
Share price: 251p (-2.1p)
Balfour Beatty is still the largest construction company in Britain but recently it has been looking further afield to secure its growth. The push into the US seems to have reaped rewards – yesterday it announced a contract with a commuter rail project in Denver, Colorado, called Eagle.
The contract win was helped by its takeover of Parsons Brinkerhoff, one of the most recognisable names in the American construction industry, for $626m last September. Before that, 60 per cent of Balfour Beatty's revenues came from the UK (30 per cent from the US) and it was desperate to take some eggs out of its largest basket. The company's full-year results, published in March, showed that profits had dipped slightly, but the chief executive, Ian Tyler, remained bullish about the shape of the business and its prospects.
Analysts were happy that the company had beaten expectations, with many putting the performance down to the international structure of Balfour Beatty's business.
There could be significant opportunities for the company, and Panmure Gordon has it on an attractive price of 7.6 times estimated full-year earnings. Balfour Beatty is a good recovery play, but we are waiting to see further signs of a significant return of global infrastructure opportunities. Hold.
Our view: Buy
Share price: 358p (-5p)
Consort Medical, a medical devices group, is not one for the faint-hearted. It announced its preliminary results yesterday, and blamed the weak US hospital market for a 6 per cent decline in pre-tax profits. The news followed a year when the company's shares fell by more than 10 per cent.
But those who prefer their investments in the fast lane may be tempted. Consort is pinning its hopes on its Bespak respiratory business, which managed to exceed expectations, despite the indifferent group numbers. The company, whose head office is in Hemel Hempstead, Hertfordshire, said Bespak products already helped to deliver medication to up to 100 million people with respiratory disease.
As with many recent company results, Consort's outlook is more positive than the numbers. However, if punters accept the potential of the Bespak products, there is a cheap stock on offer here. Trading on a 2010 price-earnings ratio of 9.2 times, Consort is inexpensive.
All of the above can be considered irrelevant, however. The dividend yield of 5.3 per cent alone justifies buying shares. Assuming that the company is not a basket case, and Consort isn't, investors should be supporters of the stock, so buy.
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