The FTSE 100 seems like it’s turned upside down these days, with plenty of previous darlings pummeled by Brexit fallout, while less glamorous shares have been mopped up by investors looking for safety.
Flight to safety
Look at DCC (LSE: DCC), the diversified support services group. If you’d bought shares five years ago, today you’d be sitting on a 250% gain! Dividends have been modest, but with that kind of capital growth, who needs them?
There was a downwards blip after the referendum, but DCC shares quickly recovered and climbed above June’s levels, as investors looked for Brexit-safe havens for their cash. But with the shares’ valuation soaring, cooler heads brought a bit of sanity back to the party, and since 5 October we’ve seen the price fall back by 12.5%.
That does include a 5% boost on Monday, in response to a “very strong first half performance” reported for the six months to 30 September.
The company recorded a 33% rise in operating profit, with adjusted earnings per share up 31%, and upped the interim dividend by 12.5% to 37.17p per share. The forecast dividend yield for the full year stands at under 2%, but a progressive policy is always good to see.
DCC also upped its full-year guidance, saying that adjusted EPS should be “significantly ahead of the prior year and ahead of current market consensus expectations“, so does that mean it’s time to buy?
The problem I see is that the shares already looked overvalued on the current consensus, even after the last month or so of falls. And even if forecasts are uprated now, I think we’re still looking at pricey shares. Current forecasts suggest P/E multiples of 20 to 21 for this year and next, which is around 50% above the long-term FTSE average — for shares paying lower-than-average dividends.
I know good companies do command higher valuations, and I’m convinced DCC is a good company. But I just see the shares are a bit overpriced right now — I’d be looking for possible future dips before I’d consider buying.
Bargain rentals
Shares in Ashtead (LSE: AHT) have soared since the Brexit vote, and have put in a further surge since the good folk of the USA saw fit to elect Donald Trump as their next president.
The company is in the equipment rental business, offering construction equipment and the like, and its services extend across the UK, US and Asia. So it’s a picks and shovels business (which I like, as they often do well whichever end-user sector is doing best), and its international spread limits its exposure to local politics.
I see Ashtead shares as cheap, too, even after their recent gains — we’re looking at P/E estimates of 14 this year, dropping to around 12.5 next, with the shares priced at 1,415p. That’s close to the long-term FTSE average, and though the shares are not as big a bargain as they were a few months ago, I think we’re still looking at a good investment at a reasonable price.
The terrific run for the firm’s earnings per share of the past few years looks set to slow a little and PEG ratios are starting to top out, but analysts still have double-digit rises forecast, and they’re putting out a firm ‘buy’ consensus.
Ashtead would be my choice of the two.