Ashtead shares tumble

The tool and equipment hire company will announce its first-quarter results on 2 September, and despite record earnings the share price has taken a knock.

London Stock Exchange
Source: Bloomberg

Ashtead’s business is performing very well, and it posted record annual profits in June 2015. The key metrics like pre-tax profit, revenue and dividend all grew by double digit percentage points. As I previously stated, the strong US and UK construction industries have been a major contributor to Ashtead’s record earnings, but it is worth noting the cut backs in the oil and gas sectors have trickled down to the company.

While the price of oil remains at multi-year lows, we can expect fewer contracts from energy firms as their capital expenditure budgets will keep being cut. But on the other hand, low oil prices will keep the threat of inflation low, and this will keep interest rates from being hiked.

Ashtead derives approximately 80% of its of income from the US, and the possibility of an interest rate hike from the Federal Reserve has been diminished in light of China’s devaluation. The Bank of England is in a similar situation to that of the US central bank, and while the cost of borrowing isn’t set to change any time soon it will help Ashtead’s business.

When Ashtead reveals its first-quarter results, traders are anticipating revenue of £594 million and adjusted net income of £90 million, which compares with last year’s final-quarter revenue and adjusted net income of £538 million and £73 million.

Ashtead will announces it full-year results in June 2016, and dealers are expecting revenue of £2.46 billion and adjusted net income of £400 million. These forecasts represent a 21% rise in revenue and a 25% jump in adjusted net income.

Investment banks are very bullish on Ashtead, and out of the 18 recommendations, 14 are buys, three are holds, and one is a sell. The average target price is £13.01, which is 40% above the current price.

In May 2015, Ashtead’s share price hit an all-time high, and this happened one month before the company announced record annual profits. Even though the company’s fundamentals are strong, the share price action since then tells a different story.

The £12.12-£12.30 area have proved to be a major level of resistance for the stock, and the support in the £8.15 region is the downside target, and a drop below it will bring £7.30 into the fold. The resistance at £9.80 will be a barrier to any positive moves, and should it be taken out the next level of resistance will be £10.75.

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