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Dr. Paul Price
Dr. Paul Price
Articles (504)  | Author's Website |

Two 'Busted Deal' Stocks Worth Considering: United Rentals, Inc. and Harman International, Industries

January 19, 2008 | About:

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.

About the author:

Dr. Paul Price

Visit Dr. Paul Price's Website

Rating: 3.0/5 (19 votes)


Highroi - 8 years ago    Report SPAM
I agree that these stocks have taken undue punishment but

to this day I think people anchor their analysis far too much on what value line estimates for a median P/E ratio.

To me this is complete nonsense and goes against doing one's own due diligence. Don't even get me started on the flaws of using Price Earnings ratio in valuation.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
For Harman Intl. ROTC was 10.1% - 19.5% in each year 2003 - 2007. ROE was 16.1% - 21.9% over that same period.

For United Rentals ROTC ranged from 4.9% - 8.8% from 2004 - 2007. ROE was 11.5% - 16.2% over that same span.

Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
The latest Value Line edition [January 25 issue]had their new full-page write-up on United Rentals. They see $2.90/share for 2008 - right in the mid-point of the company's own projection range.

At $15.90 URI shares are now at 5.5X 2008 estimates.

Harman Intl. closed at $38.40 - up $1.32 or + 3.56% in today's down market.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
After just 10 calendar days [and only 5 trading days,] HAR has surged from $36.25 to $41.67 or + 14.95%.

United Rentals has moved from $16.02 to $16.83 or + 5.06% over the same 10 days since the original posting.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
As of Jan. 29th:

More progress.

HAR $43.23

URI $17.25
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago


United Rentals Is The Name,Value Investing Is The Game

January 23rd, 2008 | by alexg |

It is amazing what a volatile market can do. As I experience my first market correction of my short investing career, everything that I have read has prepared me in finding the bargains. The big financials are the obvious choices but finding a small well-run company is where the big money is made. I could sit here and write several articles on big banks but that is not why I set up this blog for in the first place. I wanted to find small caps that would outperform the market in the long run. Lately, I have hit the books and came out with a big catch. United Rentals (URI) is the name and value is the game.

Business Profile from Yahoo Finance

United Rentals, Inc. operates as an equipment rental company worldwide. The company offers for rent approximately 20,000 classes of rental equipment, including general construction and industrial equipment, aerial work platforms, general tools and light equipment, and trench safety equipment.

United Rentals was supposed to be acquired by Cerberus Capital Management LP $4 Billion ($34.50/share) but Cerberus decided to pull out of the deal in November. After the pullout, the stock plunged more than 30% and drifted lower to its current stock price of $16. At these levels the stock trades at 2 times cash flow and 6 times earnings.United Rentals normally trades at 11 times earnings. Its return on equity for the past twelve months is 17% but I see a normalized return on equity being 15%. Gross margins have consistently average more than 30% and operating margins averaging 15%.

The market currently values United Rentals at 1.37 billion. This is well below its property,plant& equipment (PP&E). The company values its PP&E at 3.33 billion. Of that 3.33 billion, 2.918 billion consists of rental equipment. Assuming the aerial lift equipment , earth moving equipment, forklifts and trench machines are valued at 50%, we can value the equipment at 1.459 billion or $17/share.

For the quarterly period ending September 30,2007, United Rentals reported earnings before interest and taxes of 218 million bringing its trailing twelve months total to 1.16 billion. With an enterprise value of 4.02 billion, the company trades at a pretax earnings yield of 28.8%.

Trailing Twelve Months Revenues: $3.74B

Pretax Margin: 9%

Net earnings: $.3366 ($3.96/share)

WACC: 10%

Estimated Value: $39/share

WACC:12%= $33/share

WACC:15% =$26/share

As you can see the business currently trades with a margin of safety according to my earnings power valuation. In addition, United Rentals has the assets to provide the intelligent investor safety just in case the company hits a speed bump. I will be adding United Rentals to the Garcia Value Fund. Unfortunately, I have no cash on hand and decided Waste Management (WMI) and True Blue Inc (TBI) would be the ones to sacrifice. United Rentals will be my largest position representing 8%. I want to take advantage of market conditions right now as I feel Mr. Market is offering bargains that I have not seen in my short investing career.

Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
URI closed today Jan. 30th at $17.42.

HAR closed today at $44.86.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
In exactly two weeks from the article's posting:

HAR went from $37.02 to $48.00 or + 29.66%.

URI increased from $16.02 to 19.05 or + 18.91%.

They're both still well under fair value.
Kfh227 - 8 years ago    Report SPAM
Harmon is not hi-fi. It's ovepriced garbage much like Bose. They are more of an advertising company than anything else.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
BWM,Chrysler and Audi[and buyers of their vehicles] obviously do not agree with your negative assessment.
Figurenzauberer - 8 years ago    Report SPAM
hey stockdocx

lets continue with the discussion:

1) When u look @ free cashflow for the past 5 years it looks like this:

347.0 247.4 269.3 40.5 (32.6)

So obviously there are some troubles to solve - do u have any ideas why their cap ex exceeded

their operating earnings in the past year?

2) lets discuss economic moat: HARMAN is known wordwide for high quality audio equipment, which is positive - but unfortunately this business is highly competitive. I will just name 2 big players among many: BOSE (long term rival), APPLE (takin away share from home hifi) and then there are many regional rivals (in Germany eg. Magnat & Canton...)

My point here is, that their profit margins are unlikely to remain stable or even to widen as they face serious competition.

Finally I think HARMAN is really cheap right now, but its also growing quite unprofitable having only a narrow economic moat without pricing power.

So now its your turn! Go Ahead!
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
According to Value Line:

Harman Intl. posted cash flow/share numbers and capital spending/share as follows:

FY 2003 CF = $2.97 - Cap. Spend. = $1.79 = Free Cash Flow = $1.18

FY 2004 CF = $3.99 - Cap. Spend. = $2.05 = Free Cash Flow = $1.94

FY 2005 CF = $5.27 - Cap. Spend. = $2.59 = Free Cash Flow = $2.68

FY 2006 CF = $6.02 - Cap. Spend. = $1.98 = Free Cash Flow = $4.04

FY 2007 CF = $6.17 - Cap. Spend. = $2.68 = Free Cash Flow = $3.49

Net Profit margins for those same 5 years:

FY 2003 = 4.7%

FY 2004 = 5.8%

FY 2005 = 7.7%

FY 2006 = 8.3%

FY 2007 = 7.8%

The past three years showed the best net profits margins in the past 16 years for HAR.

I have no idea as to what you are referring to when you say they are 'unprofitable' as even the 'recession year' estimate for the FY ending June is for over $3.00 /share PROFIT.
Stocnurse - 8 years ago    Report SPAM
With all due respect I have been watching your picks over the past 6 months and was wondering , how are you dealing with your big losses, do you have alot of profit carry forward from years prior , so its ok to loose so much money?

Figurenzauberer - 8 years ago    Report SPAM
Now that is extremely interesting: I took the numbers from morningstar.com and obviously the widely differ from your value line figures.

When I got time I'll work through HAR past annual's to get a clear picture!

Don't let me be misunderstood - it's obviously important to get this right as with the figures I had it seemed that many earnings were eaten up by cap ex, as you remember the "owner earnings" are nothing but (earnings+depreciation)-cap ex (which are not used to grow the future earnings)

Dr. Paul Price
Dr. Paul Price premium member - 8 years ago

Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
United Rentals 4Q Profit Nearly Triples

Posted: 2008-02-29 08:50:36

GREENWICH, Conn. (AP) - United Rentals Inc.'s fourth-quarter profit nearly tripled, boosted by a break-up fee a private equity group had to pay for reneging on plans to buy the company.

In a press release Thursday, the equipment rental company said net income rose to $153 million, or $1.35 per share, from $53 million, or 49 cents per share, in the year-ago period.

The result was boosted by a $100 million payment from private equity firm Cerberus Capital Management, which backed out of a planned $4 billion purchase of the company last November.

Earnings from continuing operations rose to 84 cents per share from 71 cents per share last year. That result was better than the 73 cents per share expected by Wall Street, according to Thomson Financial.

A drop in sales of contractor supplies and new equipment offset higher equipment rentals, sending revenue sliding 1 percent to $930 million from $939 million.

For the year, net income climbed 61 percent to $362 million, or $3.25 per share, and revenue rose 3 percent to $3.73 billion.

In premarket trading, United Rentals shares rose 33 cents to $19.30 after closing Thursday at $18.97.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
Guru Bruce Berkowitz bought a new position in United Rentals [URI] during the March quarter.

His new holding totaled 4,494,800 shares at an average price of $18.20/share.

URI CLosed today at $20.52/share.


Harmon International [HAR] the other stock in the original posting closed today at $43.69 /share. It's doing well also.

Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
Guru Ron Baron bought a new position in Harman Intl. [HAR] in the March quarter.

He held 2,272,665 shares at an average price of $46.20 as of March 31, 2008.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
Guru Bruce Berkowitz more than doubled his position in United Rentals on May 31st.

He added 105.36% at an average cost of $20.59/share.

He now holds 9,230,600 shares.
Dr. Paul Price
Dr. Paul Price premium member - 8 years ago
United Rentals announces planned tender offer to repurchase up to 27,160,000 shares of its common stock through a modified dutch auction at a price not less than $22 nor greater than $25 per share (URI) 19.60 :

Co announces that its board of directors has approved a "modified Dutch auction" tender offer in which the co intends to offer to purchase up to 27,160,000 shares of its common stock at a price not less than $22.00 nor greater than $25.00 per share. The number of shares of common stock sought to be repurchased in the tender offer represents approximately 31.4% of the total number of shares of common stock currently outstanding. If the maximum number of shares is purchased at the high end of the price range, the total purchase price for the common stock would be $679 mln.

The co intends to commence the tender offer within the next week and will keep the offer open for at least 20 business days... The co also announced today that it has repurchased all of its outstanding Series C preferred stock and Series D preferred stock, a substantial majority of which was held by Apollo Investment Fund. Under the definitive repurchase agreement, the total purchase price for the preferred stock is approximately $679 mln. In anticipation of the share repurchases, on June 9, 2008, the co entered into a new $1.25 bln asset-based loan facility and repaid the approximately $464 mln outstanding under the co's former revolving credit facility and term loan. Pursuant to the purchase agreement with the preferred holders, the co issued to the former preferred holders $425 mln aggregate principal amount of 14% notes due 2014.
Mungerite - 8 years ago    Report SPAM
These did good doc kudos.
Arjun3 - 8 years ago    Report SPAM
Doc, you take a lot of heat here, and while I don't always agree with everything you say, I appreciate the leads you give. I bought some leaps on URI a couple months ago (based on your lead, with additional research), as one of only 5 positions that I'm holding. It's doing well, with a good runway ahead of it. Thanks a lot for the heads up.

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