United Rentals Regains Its Stride

3/2/2015


  Recent Price
$94
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
14
  Shares (millions)
103
  Long-Term Debt as % of Capital
81%
  52-Week Price Range
$119.83 - $81.25

United Rentals ($94; URI) shares have rallied 16% from their January low but remain well off their September high of nearly $120. That share-price volatility partly reflects investor concern over the company's exposure to the energy sector.

But the stock's reaction seems overdone given United Rentals' strong operating momentum and limited presence in the North American oil industry. Management says upstream oil-and-gas customers represent just 6% of revenue, and though exposure to the energy sector could weigh on results this year, low oil prices should also help propel growth in manufacturing end markets.

The company grew rental revenue 12% last year, exceeding the 7% growth for the North American rental industry. Total revenue climbed 15%, while cash from operations increased 16% and per-share profits jumped 45%. Boding well for future growth, United Rentals expects 3.5% higher rental rates this year.

The stock trades at 14 times trailing earnings, a 14% discount to its three-year median — fewer than 20% of stocks in our research universe trade at a bigger discount to their historical norms. United Rentals is a Focus List Buy and a Long-Term Buy.

Business breakdown

United Rentals claims to control a 12% share of the U.S. equipment-rental market — twice the size of its next-largest rival. The rental market seems likely to increase penetration as more companies seek to avoid costs of ownership, which range from up-front capital investment to maintenance and storage.

Last April, United Rentals acquired National Pump, the second largest specialty-pump rental company in North America. About half of National Pump's $210 million in annual revenue came from energy and petrochemical companies. The deal's price tag could rise above its current $850 million with future cash considerations.

United Rentals folded National Pump into its specialty-rental business (now 18% of rental revenue), which generates higher profit margins than general rentals (82%). Aside from pumps, the specialty business includes diesel generators, air-conditioning equipment, and trench-safety equipment. The company hopes to cross-sell these rental products to customers who already use its general construction and industrial equipment, such as backhoes, forklifts, and earth movers. Over time, the broader business mix could make the company less cyclical and attract bigger customers.

Conclusion

Researcher IHS Global projects the North American rental market will grow revenue 8% this year. Consensus estimates call for United Rentals to deliver per-share earnings of $7.98, up 16%, on revenue growth of 7%. Analyst estimates have faced downward pressure in the past two months, but now appear to be stabilizing.

At 10 times estimated 2015 earnings, the stock fetches a 40% discount to the S&P 1500 industrial sector median of 16.

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
Dec '14
2.19
vs.
1.59
17%
119.35
-
88.34
19 - 14
Sep '14
2.20
vs.
1.63
18%
119.83
-
103.60
21 - 18
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
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
5.69
6.91
0.00
119.83
-
74.32
17 - 11
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
83
71
80
93
57
25
16

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


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