Like just about every other stock, United Rentals Inc. (URI, Financial) took a beating in early March. Then, from a bottom of $70.89 on March 23, it more than tripled to reach $246.75 on Dec. 9, as shown on this year-to-date chart:
Since then, it's pulled back to $229.16 (at the close of trading on Dec. 18), which raises the question: "Is this a good time to buy United?" Not just for what it might do in the next month or year, but for what it might do over the next five to 10 years.
The company
Based in Stamford, Connecticut, United Reals describes itself, in its 10-K for 2019, as the world's largest equipment rental company, with operations in the U.S. and Canada, as well as a "limited" presence in Europe. It has a market cap of $16.30 billion, with total revenue last year of $9.35 billion from 1,175 locations.
Roughly 15% of last year's revenue and earnings came from $5 billion worth of acquisitions in recent years. Organic growth was up 4% on a year-over-year basis.
Short-term factors behind the growth of the share price include the pace of recovery in its markets, enough to allow CEO Matthew Flannery to announce higher guidance for the full year:
"The recovery that we've seen since the spring has been evident in most of our markets with demand tracking to normal seasonal patterns. We expect current trends to continue and have raised our full-year 2020 outlook for revenue, profitability and free cash flow. While the pace of the recovery remains uncertain, we are encouraged by the steady improvements we are seeing. Most importantly, we remain confident in our ability to execute well under any market conditions."
In the longer term, the results likely reflect the company's strategy, as explained in the 10-K:
"For the past several years, we have executed a strategy focused on improving the profitability of our core equipment rental business through revenue growth, margin expansion and operational efficiencies. In particular, we have focused on customer segmentation, customer service differentiation, rate management, fleet management and operational efficiency."
United's tactics include customer service standards, optimization of its customer mix and fleet mix, use of lean management techniques and strategic acquisitions.
The company describes the North American equipment rental business as fragmented and competitive. That includes everything from small businesses with one or two locations to public companies that operate nationally or internationally, as well as equipment vendors and dealers that both rent and sell directly to customers.
United's three biggest competitors, based on revenue, are Ryder System Inc. (R, Financial), Amerco Inc. (UHAL, Financial) and Rent-A-Center Inc. (RCII, Financial); of course, these companies compete in partially overlapping markets rather than going head to head with each other.
Fundamentals
The company receives a rating of just 3 out of 10 for financial strength, and the reasons can be found in this table:
The debt load is heavy, an issue the company conceded in the risks section of its 10-K, "our significant indebtedness (which totaled $11.4 billion at December 31, 2019) requires us to use a substantial portion of our cash flow for debt service and can constrain our flexibility in responding to unanticipated or adverse business conditions."
However, United is not the only equipment rental company carrying a significant debt load, as shown in this 10-year chart:
United's ability to carry that debt is aided by its profitability; the GuruFocus system gives it an 8 out of 10 rating. United's operating margin is 21.84% and its net margin about half that at 10.69%. It generates a return on equity of 24.27% (suggesting a strong moat) and a return on assets of 5%.
Its growth rates are also impressive. Over the past three years, the average annual revenue growth rate has been 22.40%, the average Ebitda growth rate has been 21.20% and earnings per share without NRI have grown even more dramatically at 32.80%.
United does not pay a dividend, but has been buying back stock over the past six years, reducing its count by 26.88% since late 2013:
Valuation
We've got a range of valuations for United, starting with a high one from the GuruFocus Value chart:
It has a price-earnings ratio of 18.16, which is below the business services industry median of 19.97 over the past decade. It is above its own 10-year median of 16.23.
However, United is fairly priced when its growth rate is considered. The PEG ratio, which is calculated by dividing the price-earnings ratio by the five-year Ebitda growth rate, comes in at 1.14. That's fairly close to the fair value benchmark of 1.
The discounted cash flow calculation, based on a good predictability rating of 4 out of 5, is more aligned with the GuruFocus Value chart than the PEG value. The price closed at $229.16 on Dec. 18, but the DCF valuation comes in at just $135.05, resulting in a negative 69.69% margin of safety.
Overall, the metrics suggest that although the share price has pulled back, it is still expensive.
One more note: Give credit to GuruFocus writer Jonathon Poland, who concluded a March 2019 article ("Revisiting United Rentals") with these words:
"In 2019, the company is expected to earn north of $19 per share, which puts the forward earnings multiple at 6x. Its historical multiple is closer to 20x. Split the difference and investors getting in now may still see $250 per share in the coming years, a double from today's price."
At the time Poland wrote, the share price was $119.40, and indeed it did double, eventually rising to a high of $246.75 on Dec. 9.
Gurus
Nine of the gurus have positions in United; gurus, in general, have been doing more selling than buying for most of the past two years:
The three gurus with the biggest stakes at the end of the third quarter were Pioneer Investments (Trades, Portfolio), David Carlson (Trades, Portfolio) of Elfun Trusts and Larry Robbins (Trades, Portfolio) of Glenview Capital Management:
- Pioneer reduced its holding by 13.66% to finish the quarter with 709,245 shares, representing a 0.98% stake in United and 0.13% of its assets under management.
- Carlson made no changes in the quarter and stayed at 422,667 shares.
- Robbins pulled back in a big way, reducing his position by 75.43%, and on Sept. 30 was left with 79,450 shares.
Conclusion
United Rentals has an ambitious management team that set big goals and is on its way to achieving them. As we've seen, it has grown its revenue, Ebitda and earnings successfully over the past three years. At the same time, it has taken on a lot of debt.
Views on valuation will vary based on investors' views on growth. For those who find it critical, United will look close to fairly valued (PEG ratio 1.14) for those who don't this will be an overvalued stock.
I would expect most value investors to take a pass since there is substantial debt and no margin of safety, even in the best valuation scenario. Growth investors will want to look more closely at United because of management's intention to keep growing the company quickly. And because there is no dividend, income investors will want to look elsewhere.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
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