United Rentals Has The Right Equipment

7/28/2014


  Recent Price
$113
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
20
  Shares (millions)
106
  Long-Term Debt as % of Capital
79%
  52-Week Price Range
$114.95 - $52.39

With a 12% market share in U.S. equipment rental, twice that of its largest competitors, United Rentals ($113; URI) is seeing strong demand for energy projects and an upswing in commercial construction.

Shares rallied on a strong June-quarter report, with per-share profits surging 47% to $1.65 excluding special items, well ahead of the consensus of $1.46. Revenue jumped 16% to $1.40 billion, also ahead of the consensus. Rental revenue rose 17% to $1.18 billion. Cash from operations rose 16% to $546 million. The stock remains a Focus List Buy and a Long-Term Buy.

Reasons for confidence

Operating cash flow has grown by double digits in each of the past seven quarters, and sales are up at least 7% in 15 consecutive quarters. United Rentals has increased operating profit margins by at least one percentage point for 17 straight quarters.

The steady expansion of profit margins reflects an ability to raise prices. United Rentals said rental rates should climb 4.5% for the year, ahead of its prior target of 4.0%. Over the long term, United Rentals expects rental rates to advance at an annual clip of about 3%.

This month, management raised its 2014 guidance for operating profits, sales, and free cash flow. United Rentals now targets 12% to 14% growth for sales, up from the consensus of 12% at the time of the announcement.

Based on industry projections, United Rentals should have a long runway ahead for more growth. Researcher IHS Global Insight predicts North American revenues for equipment and tool rentals will rise 8% this year, followed by 11% in 2015 and 10% in 2016.

Management is trying to make its business less cyclical by diversifying its mix of end markets, courting bigger customers, and bolstering its specialty fleet, currently 19% of rental revenue. United Rentals boosted its high-margin specialty business with the April acquisition of National Pump for about $850 million. National Pump, the second-biggest specialty pump-rental company in North America, increases United Rentals' exposure to the booming shale oil industry.

United Rentals sees three key demand indicators in its industry: time utilization, rental rates, and used-equipment prices. For now, according to the company, all three of these indicators are strong.

Conclusion

United Rentals' shares have surged 68% since we first recommended the stock in November, versus a 9% gain for the S&P 1500 Industrial Sector Index. Yet at less than 20 times trailing earnings, shares trade in line with their three-year average and 7% below the sector median.

The stock's rally has positioned it as a prime candidate to join the S&P 500 Index, a development that could spark a bounce as index-fund managers purchase the shares. With a market value of $11.83 billion, United Rentals is the largest company in the S&P MidCap 400 Index, bigger than 30% of S&P 500 Index companies.

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
Jun '14
1.65
vs.
1.12
16%
108.46
-
85.01
21 - 16
Mar '14
0.90
vs.
0.58
7%
96.51
-
74.32
20 - 15
Dec '13
1.59
vs.
1.27
7%
78.37
-
55.05
17 - 12
Sep '13
1.63
vs.
1.35
8%
59.84
-
49.51
14 - 11
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2013
4.96
4.91
0.00
78.37
-
44.85
16 - 9
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
95
60
92
52
53
93

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


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