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(Sharecast News) - Liberum upgraded equipment rental firm Ashtead on Friday to 'buy' from 'hold' and hiked the price target to 4,900p from 3,800p, "as government programmes kick in".
The broker said that given the rapidly moving macroeconomic backdrop, it has chosen a pair trade for its "best idea": long Ashtead, short Ferguson.
"The two are both fantastic companies with strong balance sheets, high returns and leading market positions. They are both gaining market share year after year, organically, boosted by bolt-ons.
"We prefer Ashtead as it is overweight in commercial and infrastructure building in the US, where any cyclical weakness will be offset by help from mega-projects and US government largesse.
"Ferguson is overweight residential construction (54% sales) which is weakening rapidly," it said adding that valuations are low for both.
Liberum noted that Ashtead's shares have de-rated from 28x forward earnings to 13x as the market's appetite for growth and cyclicals has weakened.
"Ashtead appears to have been punished for both characteristics," it said "During its de-rating, earnings estimates have improved by around 18%. Delivery of earnings in line with estimates should drive improved valuation from lows, while its growth characteristics might become more valuable if bond yields stabilise."
Liberum said the shares are quite sensitive towards confidence in US economic growth, "perhaps wrongly if the long pipeline of mega-projects in US non-residential construction does offset any cyclical decline in the coming year".
