Today's reassuring trading update from emergency power specialist Aggreko (AGK) has helped return strength to the share price. Despite falling in the first few minutes of trading today, Aggreko has since turned blue on the stockmarket with a 1.4% rise to £17.85.
When a stock is in a rising trend, it often takes earnings upgrades to fuel this momentum. Upgrades tend to come when trading is ahead of expectations. In Aggreko's case, it used to be in an upgrade cycle but then suffered two profit warnings in 2012. Not only did this end a three-year share price rally; but also put its share price on a downwards trend.
So when seemingly-troubled companies issue a trading update that says there are no more problems and earnings are now in line with forecasts, such a message can be a positive signal for the share price. Well, at least providing a temporary relief rally. This explains the share price reaction to today's trading update.
Aggreko has reported 8% growth in underlying revenue for the first three months of 2013. It says the local business – which rents power and and temperature control systems – has had a 'very strong' start to the year with 17% more power on rent than a year ago.
On Twitter, Paul Kavanagh of stockbroker Killik made an interesting point that £260 million capital expenditure is planned for 2013, slightly more than the market's £240 million forecasts. Yet he points out that this is 'well down' on the £400 million spend in 2011/12. Growing investment in new equipment can be a bullish sign for asset rental firms. It suggests that demand for their kit is growing, so they need to expand their fleet.
Stockbroker Panmure Gordon reckons today's update puts Aggreko on a 'solid footing' and as such it has increased its price target from £17.27 to £21.06 and switched from 'hold' to 'buy'. In a note to clients, it writes: 'While it remains early days, growth in Local Business revenues ahead of expectations bodes well for the rest of the year given the prospects pipeline in Power Projects has improved, and - while my betting slips from last week’s Grand National meeting fail to back this up - it remains difficult not to back the clear favourite in this market.' The reference to Power Projects is Aggreko's other division which builds and operates temporary power plants.
Espirito Santo is also a buyer of the stock with a £23.50 fair value price. It says: 'While Aggreko’s Q1 growth is subdued relative to prior years, today’s statement is as expected and provides reassurance: the business is still growing, there has been no further downward revision to market guidance, full year capex is in line with our expectation and the local business has clearly had a good start to the year.' The broker adds: 'Short-term pressures do constrain growth in 2013, but we believe the shares still offer good long-term potential. We believe a high rating remains justified due to the group’s structural demand drivers and its approach to maximising business efficiency, which should sustain double-digit revenue growth with a c.15-20% return on invested capital.'
To discover Shares' views on the asset rental sector in more depth, we published a detailed article yesterday (11 Apr) on this segment of the support services industry. Click here to read.