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In Practise Investor Dialogues gathers a group of professional investors to explore the value drivers and risk factors of a specific business, moderated by In Practise. Attendees are selected on the basis of the depth of their knowledge of the security that is subject of the dialogue.
Analyst 1: Personally, I think a lot of it has to do with where in the cycle of consolidation these companies have come from and where they are going to. If you look around the rest of the world, the United States is pretty unique in a number of aspects, that set up Ashtead to be this company, similar to an Amazon where, in essence, you have got a company that sets up clustered distribution and can then drop new pieces of equipment into that clustered distribution network. What makes Ashtead a little bit different from URI, in terms of looking at how each company presents each other, is that Ashtead seems to be focused on this aspect of consolidating the markets, focusing a lot more on the local aspects. URI seems to highlight a lot of their national contracts, which I think is an important business to be in, but I think Ashtead just focuses on the local stuff.
The other primary difference that I see is, where is the growth coming from? Ashtead’s store openings are 7% to 10% of their base, each year; URI is 3%. The organic growth difference is just very high. The other aspect is in the specialty piece of the business. They are both growing speciality at comparable rates, 10% higher than the core business, I think. But what I see is that Ashtead has more of an organic growth flavor than URI. URI does have organic growth, but a lot of their growth has been through acquisitions which can be good, but that does have its own challenges, just from cultural perspectives and the melding together.
The key thing, I think, in these businesses, if you look at them on their local clusters, is the advantages in local economies of scale that they get. In the leasing business, as it gets bigger, it gets better. As you get bigger in a local market, you actually have more pieces of equipment and you can, more easily and more efficiently, distribute across a given customer base. The smaller players in the market don’t have that scale and so the bigger guys can get better margins, better terms and better financing. I have talked with some guys that were bankers and some of the big bankers will say they will only finance URI or Ashtead because they have so much more resilience.
What has happened now, versus the past, is that these two companies have consolidated market share significantly. You can see it in their margins – their margins are up 10%, versus pre-2008 numbers – and you can see it in the returns on equity that these businesses are getting. I think there is also another interesting aspect; the historical view on these things is that they very capital intensive but I think it really depends upon the way you look at it.
The way somebody like Ashtead is going to do it is they are going to buy equipment, they are going to get a discount from the OEM, they are going to rent it for a few years and then they are going to sell it. In essence, really, the only capital expenditure in here is in that in-between time where they are leasing the equipment. If they are a good trader of this equipment – and in most cases they are – they can make a good amount of money on that aspect of the business, as well.
From what I can see, these guys are in the right market, at the right time. There are other markets where there is equipment rental, around the world, but I see it working well in the US, in terms of the way it is structured and the ability to do this clustering. A lot of it has to do with the geographies. In the US, you have clustered geographies that it makes sense in. In some other countries, you may have a bunch of activity in just one large city within it, so you can cluster around that, but there are not a whole lot of places to cluster. I think it’s a combination of geography and the markets that they are in and them being one of the top two guys in this market. Those are some of my thoughts on the uniqueness of Ashtead and why I think it’s an interesting business, from that perspective.
Analyst 2: I agree with that and, I would argue that Ashtead is still trading almost like a cyclical business; if you look at historical PEs, it has traded between eight, nine times and 15, 18 times, apart from the immediate post-Covid period, where a lot of stocks got expensive. There is still worry about the cyclicality and the impact it can have on earnings.
Echoing the previous comments, the clustering strategy is something that was developed very early on, by Ashtead, and they have been talking about it for a decade and a half, establishing those designated market areas and focusing on developing them. That is what they call cluster economics; it is something that comes up time and again in their communication.
The other thing that I would say is that they are very mindful of the fact that they need to encourage increased market penetration of rental. Basically, rates have been going up in the last two years, but they are very mindful of the fact that it is important that rental stays competitive, as an offering for clients, so the penetration keeps increasing.
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