The stock of United Rentals (NYSE:URI, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $348.14 per share and the market cap of $25.2 billion, United Rentals stock shows every sign of being significantly overvalued. GF Value for United Rentals is shown in the chart below.
Because United Rentals is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 14.6% over the past three years and is estimated to grow 2.90% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. United Rentals has a cash-to-debt ratio of 0.03, which which ranks in the bottom 10% of the companies in Business Services industry. The overall financial strength of United Rentals is 4 out of 10, which indicates that the financial strength of United Rentals is poor. This is the debt and cash of United Rentals over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. United Rentals has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $8.5 billion and earnings of $12.69 a share. Its operating margin is 21.63%, which ranks better than 90% of the companies in Business Services industry. Overall, GuruFocus ranks the profitability of United Rentals at 9 out of 10, which indicates strong profitability. This is the revenue and net income of United Rentals over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. United Rentals's 3-year average revenue growth rate is better than 83% of the companies in Business Services industry. United Rentals's 3-year average EBITDA growth rate is 15.4%, which ranks better than 70% of the companies in Business Services industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, United Rentals's return on invested capital is 8.37, and its cost of capital is 10.80. The historical ROIC vs WACC comparison of United Rentals is shown below:
In conclusion, the stock of United Rentals (NYSE:URI, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 70% of the companies in Business Services industry. To learn more about United Rentals stock, you can check out its 30-year Financials here.
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