Rent The Gear, Own The Stock

12/2/2013


  Recent Price
$69
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
15
  Shares (millions)
106
  Long-Term Debt as % of Capital
80%
  52-Week Price Range
$69.41 - $38.82

United Rentals ($69; URI) started as an idea hatched at a dining-room table, that a national equipment-rental company could shake up a fragmented market dominated by local players. Formed in 1997 through the combination of six companies, United Rentals today claims to be the largest equipment-rental company in the world, with more than 800 rental locations in the U.S. and Canada.

In a capital-intensive industry, United Rental's scale gives it purchasing power and the ability to leverage a broad range of equipment and services into national accounts. The company also appears positioned to catch the rebound in commercial construction, taking advantage of what it calls a secular shift toward renting equipment rather than buying it. The stock is a Buy and a Long-Term Buy.

Business breakdown

United Rentals generated year-to-year growth of 26% for sales, 57% for earnings per share from operations, and 125% for operating cash flow for the nine months ended September. Adjusted for the $4.2 billion acquisition of RSC Holdings in April 2012, sales rose 6%.

In 2012, United Rentals' long-term debt increased 150%, mostly because of the merger, and the share count increased 43%. While the ratio of long-term debt to equity has ballooned to 4-to-1, over the last year the company generated enough cash to cover interest costs almost three times over. The deal boosted the company's inventory of rental equipment by 50%, while expanding its exposure to the industrial market. Return on assets has sharply improved in the past two quarters, suggesting the merger helped its profitability, at least according to U.S. accounting standards.

Equipment rentals generated 85% of the company's revenue in the first nine months of 2013. United Rentals offers about 3,200 classes of equipment, including aerial-work platforms, trench-safety equipment, backhoes, forklifts, and power tools. The sale of new and rental equipment accounts for 12% of revenue. Contractor supplies and repair and maintenance services make up the last 3% of sales.

Management has focused on boosting the efficiency of its core rental business, resulting in 14 straight quarters of higher gross and operating profit margins. This year, the company has improved profit margins by increasing the proportion of monthly rental contracts, which reduce transaction costs. However, the rise in monthly contracts has slowed growth in rental rates, up 4.2% for the nine months ended September versus a 7.3% increase in the year-earlier period.

Conclusion

Shares have rallied 44% this year yet trade at just 15 times trailing earnings, a 33% discount to their three-year average. The stock trades at 14 times projected 2014 earnings, 26% below the median for S&P 1500 industrial stocks. The consensus projects the company will grow per-share profits 23% in 2014, following 16% growth in the December quarter. Management has topped the consensus profit estimate in nine straight quarters.

An annual report for United Rentals Inc. is available at 100 First Stamford Place, Suite 700, Stamford, CT 06902; (203) 622-3131; www.unitedrentals.com.

UNITED RENTALS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '13
1.63
vs.
1.35
8%
59.84
-
49.51
14 - 11
Jun '13
1.12
vs.
0.66
21%
59.74
-
44.85
15 - 12
Mar '13
0.58
vs.
0.36
68%
56.87
-
46.67
16 - 13
Dec '12
1.27
vs.
0.82
67%
45.83
-
31.47
14 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
4.12
3.76
0.00
47.98
-
26.88
13 - 7
2011
2.61
1.87
0.00
34.78
-
12.81
19 - 7
2010
2.24
0.33
0.00
23.69
-
6.87
72 - 21
2009
2.36
-0.76
0.00
11.53
-
2.52
NM
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
78
77
89
43
34
77

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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