Ashtead shares may rebuild uptrend if US payrolls strong

Eyes on US payrolls

Shares of Ashtead Group, the FTSE 100-listed industrial machinery rental firm, are in focus ahead of crucial US economic data due on Thursday afternoon.

That’s because of the UK-based firm’s 80%-plus revenue exposure to the United States.

The data may give a clearer verdict on the US economy’s medium-term prospects, after months of uncertainty about the strength of the recovery there.

With the US economic rebound having paused in the early months of the year, constrained by a harsh winter, strong dollar and lower crude prices, Ashtead shares have been capped so far in 2015.

The stock has been unable to exceed all-time highs marked in December, after a barrage of shaky US economic news in the winter-to-spring months.

Ashtead, which hires out everything from small tools to large diggers, cranes, water pumps and powered access, with a focus on the construction industry, was judged against a US economic backdrop showing signs of slowdown, with a run of economic releases culminating in a negative Q1 GDP.

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Shares out of sync with record earnings

The US economic wobble rubbed off on Ashtead stock.

Despite the machine provider lengthening a string of record earnings that started in 2014, by posting its highest-ever underlying pre-tax profit in June, shareholder reaction was the most guarded it’s been for at least a year.

The FTSE 100’s largest ‘pure machinery’ firm made £490m before tax in its financial year ending on 30th April, compared to the consensus view that foresaw £485.94m and after £361.1m last year.

Despite that, and its CEO saying he saw an upswing in Ashtead’s key US construction market, its shares remain more than 10% lower since late May and down about 6% in the year-to-date.

Investors will also be mindful of the stock having been among the Top Three FTSE 100 performers of 2014.

Now, with good chances of a strong payrolls reading to cement views that the US economic rebound is back on track, Ashtead stock may have its best chance of the year so far to continue its advance.

Traders notch Ashtead lower

But first, AHT must definitively escape a steep short-term falling channel it’s been in struggling for the last month and a half.

Then it needs to get back within a long-term wedge that has cradled the price for the last six months.

Failure to do so could leave the stock with few visible supports, save for a falling trend from April which currently coincides with the 200-day moving average (blue).

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City Index clients trading our Ashtead Daily Funded Trade, have opted for safety so far on Thursday, as this article was going on line.

Looking at half-hourly intervals, the trade has tumbled straight to the base of a short-term up channel that commenced earlier in the week, after Ashtead DFT failed for a second time to close a gap that was the result of a sharp drop late in the 26th June session.

The tumble also coincides with a ‘go short’ signal from the attached Moving Average Convergence Divergence (MACD) trading system (first sub-chart).

Another attached system, a stochastic-based one, also provides signals, should its lines enter ‘oversold’ or ‘overbought’ extremes.

The Slow Stochastic Oscillator was closer to the former boundary as this article went online, but given strict adherence to stochastic principles—requiring its lines to cross whilst outside the boundaries; together with a bull hammer to confirm—a long signal may not be imminent.

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Calibrated with UK machine sector

Either way, just as Ashtead is strongly tied to US economic prospects it’s also a good bellwether for the prospects of similar UK firms there.

We can expect the stocks of its closest machine-sector peers like Weir, Rotork, Aggreko, and IMI to respond in kind if Ashtead gets a boost or a battering.

And don’t forget the suppliers. Premier Farnell, a distributor of small electronics and electronic parts, has clients which include the majority of the above.

Its own peer Electrocomponents Plc. is also worth watching, especially as both stocks have underperformed the broad industrial sector in the year to date.