Construction and Industrials Send United Rentals Higher

The rental company fed off a strong housing market and rising home building

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Aug 15, 2016
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Equipment rental company United Rentals (URI, Financial) thrives when housing booms, and environments in both housing and the industrials are strong and on the upswing.

United Rentals has hit a home run capitalizing on the upswings and trends; going into the July 20 second-quarter report, shareholders were blown away by the earnings beat. The equipment renter ended up delivering a 24-cent earnings beat and $1.42 billion of revenue.

Let's get up close and personal with United Rentals and see what the results say about both the housing market and current state of the industrial markets.

United Rentals' success is driven by housing

United Rental's second-quarter results continued the long run of extraordinary results from the equipment renter. Revenue only dipped to $1.42 billion, down just 0.7% year over year, which was more than most investors were expecting. Used equipment sales rose $10 million to $134 million, and even after accounting for weak commodity prices and the strong dollar, adjusted earnings of $2.06 per share beat the consensus by 24 cents per share.

Diving into United Rental's results, the impact of the current operating environment stood out. With revenue being flat earnings were up, and volume and cash flow were up as well.

United Rentals also had overall lower prices in the used equipment market with a mix of lower margin channels through its vendors. Rental revenues were up 12% in the Southeast, but there was an increase in time utilization. Revenue for the company's specialty segment was up 8.4%. Commercial activity was stable in California while the technology and entertainment sectors were responsible for driving most of the commercial revenue. Power and trench increases came from same-store growth although pump solutions revenue was down 5% due to oil and gas, but pump rental revenue was up 21%.

United Rental's Power & HVAC business was up 15.7%, but the Canadian segment of the business is down over 11%.

CEO Michael Kneeland is not afraid to adjust and change strategies. "So, in conclusion, our second-quarter performance is an accurate representation of where we believe we are in the cycle with significant amount of runway ahead," Kneeland said. "We have many levers inherent in our business model; we fine tune our operations every day using CapEx, redeployment of assets, vertical strategies, cross-selling and used equipment sales, and we'll continue to do that at every operating environment."

Can United Rentals keep climbing?

United Rentals also sees some positive trends in construction. As Kneeland noted, "There's positive encouraging comments around construction, and there's also some negative and cautious variables out there. I mentioned the ABI. The Dodge Momentum Index is another one, non-res starts, contractor backlog, the ISM, PMI, our own customer survey, these trend toward the positive. On the other side, we mentioned the Rouse non-res construction put in place that slowed a bit. The other part would be the construction employment numbers that came down."

The rental company sees the market conditions in the U.S. as favorable. Kneeland noted, "Now, of course, not everything is ideal; industrial production is lackluster. Several of our industrial markets have been challenged by weak commodity prices and the impact of the strong U.S. dollar on exports."

With the earnings beat, United Rentals shareholders saw value, and they quickly pushed the stock up 5.21% when the market opened after earnings. As long as the real estate market and industrials hold strong, United Rentals will keep finding ways to grow its rental business and produce outstanding results in the future.

Disclosure: No position in the stock mentioned.

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