Construction equipment rental provider Ashtead (AHT) has once again defied the market critics with a stellar set of quarterly numbers, taking its share price up a further 7.7% to 565p. This means the share price has risen by 166% since June 2012, a type of performance normally associated with a high-risk/high-reward small cap, not a FTSE 250 stock.

Although Ashtead still has numerous fans among the analyst community, some City experts had started to question the company's valuation, trading on 30.4 times forecast earnings for 2014, based on last night's share price and before upgrades today. Indeed, Shares has previously held the view that the stock's valuation looked lofty, particularly as its US peer United Rentals (URI:NYSE) trades on a significantly lower rating (18.2 times 2014 forecast earnings).

Yet Ashtead is delivering the goods and exceeding expectations which is why the share price continues to flourish. Third quarter figures released this morning show a 98% rise in operating profit to £64.2 million. The £2.9 billion cap says full-year results will now beat previous expectations.

This is a continuing theme for Ashtead and the regular earnings upgrades that accompany its quarterly results provide the fuel to maintain the share price momentum. It proves that highly-rated stocks can still deliver capital appreciation as long as they regularly surprise (positively) with earnings.


AHT - Comparison Line Chart (Rebased to first)


The growth driver is Sunbelt, Ashtead's US arm. The latest quarter was helped by clean-up work surrounding Hurricane Sandy which is a one-off benefit. Yet Ashtead continues to enjoy the benefits of operational gearing where a rise in revenue will equate to an even-greater rise in profit due to a predominantly fixed cost base.

Sweetening the operating profits is a lower interest charge following the refinancing of senior secured notes earlier this year. This has contributed towards an 85% rise in underlying pre-tax profit to £194 million.

So where does Ashtead go from here? It is bringing forward $100 million of fleet expenditure previously planned for the 2014 financial year, into its 2013 fourth quarter period, taking advantage of strong market demand.

Cantor Fitzgerald analyst Caroline De La Soujeole notes that the latest US construction spending statistics show a 7.1% increase in January, marking the fifteenth consecutive month of annual growth. She adds: 'Notwithstanding this, the value of the US construction market is still 27% below the peak levels reached in early March 2006, suggesting there is scope for further growth. Ashtead is ideally placed to benefit from this.'

Panmure Gordon has switched from 'hold' to 'buy' and raised its price target from 447p to 626p. It says: 'Given where we are in the cycle, the upside could still be considerable.'


10AHT - Comparison Line Chart (Rebased to first)


If you think the past year's share price performance has been impressive, take a look at a longer-term chart (see above). Anyone who took the plunge and bought stock in 2009 after the global economic crisis had obliterated cyclical stocks would now be sitting on a significant pile of wealth.

Ashtead hit a low of 33p in 2009. A nominal £1,000 investment at that stage would have bought you 3,030 shares, worth an outstanding £17,120 at today's price. That's excluding any dividend income!

Issue Date: 05 Mar 2013