United Rentals, Inc. [NYSE:URI] Jan. 18, 2008 Close: $16.02
52-week range: $15.12 - $35.56
Harman International, Industries [NYSE:HAR] Jan. 18, 2008 close: $37.02
52-week range: $36.25 - $125.13
When buy-outs fall apart the arbs flee and share prices crater. Companies that were subject to intense due diligence prior to the offers being made, tend to get thrown on the trash heap at discounts to where they were even before the deals were announced.
This is the case with URI and HAR currently.
United Rentals is the largest equipment rental firm in North America with 2007 sales near $3.8 billion. Cerberus Capital had agreed to take URI private at $34.50/share but recently backed out of the deal. URI will post a $0.50 merger termination benefit [from their collection of a break-up fee] in their just completed fourth quarter.
Not including this one-time extra, URI has said they will post $2.55 - 2.60 for the full year 2007. The consensus for 2008 is now $2.69 but the company itself indicated they expect $2.80 - $3.00 in the year ahead.
At today's $16.02 quote the P/E is just 6.3X last year's and < 6X 2008's consensus view. This is way below any normalized mulitple for URI. Value Line expects an 11X P/E for URI over the 3 - 5 year horizon.
At 11X the 2008 estimate URI shares would trade for $29.59 or + 84% from their current price. These share hit $37.80 in April of 2006 in a year when EPS finished up at $2.28. Until recently, when the buy-out fell through, the 2006 - 2007 lows were $20.30 and 24.60 respectively.
United Rentals appears to be priced for a severe recession that the company itself does not seem to feel is coming. If they're right there should be good money to be made in URI shares.
Harman International makes Hi-Fi audio for OEMs, consumers and professional markets worldwide. Non-US sales were 79% of their total revenues in FY 2007 [ended June 2007]. As with URI, a cancelled buy-out led to a severe share price downdraft from around $125 to today's $37.08.
Harman reduced their own estimate for the FY ending this June to $3 - $3.10 versus last year's $4.14/share. Now nobody wants to own HAR at a historicaly low valuation of just 12.4X the already depressed earnings estimate.
Harman's 10-year median P/E has been 22X and Value Line's assumption is that over the next 3 - 5 years these shares should return to a 19X multiple.
19X the $3.00 estimate for this June would bring these shares back to $57 or + 53.7% from where they trade right now. Long-term earnings power appears to be at least $4 - $5/share once margins return to near normal levels. Thus a $76 - $95 share price over the next few years seems very reasonable to expect.
Those targets may even end up too conservative as HAR shares touched highs of $131.70, $130.50, $115.90 and $125.10 at peaks in the years 2004 - 2007 respectively.
The only other years in the past decade when HAR shares were available at around 12X earnings were 1999 & 2000. Back then the split adjusted price troughed at $8.60 before surging to $25.20 quickly and to well over $100 over the next 5 - 6 years.
KKR [Kolberg, Kravis Roberts] holds $400 MM in 1.25% senior convertible notes [conv. @ $104/share]. As of the October 2007 proxy T. Rowe Price, Capital Research & Management, and FMR [Fideltity Funds] owned 13.9%, 12.7% and 10.6% of the shares respectively.
Risk? Until the very recent sell-off the 4-year low was $66.10 or $29.02 higher than today's price. The balance sheet is good [VL financial strength rating: B++] and earnings predictability is above average at the 70th percentile.
Both URI and HAR are as out-of-favor as anything out there today. Both are fine companies with solid profits. Private Equity firms deemed each of these to be worth much more than their present valuations not too long ago. With the share prices already down to multi-year lows the risk/reward on each looks good to me.
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