United Rentals Inc. (URI, Financial) offers equipment for rent to construction and industrial companies, manufacturers, utilities, municipalities, homeowners, government entities but mostly big machinery. The company has over 880 facilities and stores across the U.S. and Canada.
With over 50% of the equipment of United Rentals utilized for industrial purposes outside commercial or residential construction, it’s number one in the U.S. market with over 12% share. The company expects the market to grow at 7% year-over-year until 2020.
Company performance
United Rentals is trading at its lowest level in over two years under $48 per share as of Wednesday morning. In the last decade, its net income has risen 175%, total shares outstanding decreased by more than 11%, and both gross and operating margins moved higher, from 35% to 42% and 17% to 26%. United Rentals is a solid company and a leader in the industry.
In the last 12 months, United Rentals generated $585 million in net income on $5.87 billion in revenue. Analysts expect the company to reach earnings of $9 per share in 2016, generating $864 million in total income, roughly 20% of the current market cap and 7% of its enterprise value, which is one thing that concerns me despite the company generating close to $2 billion in operating cash flow.
CEO comments
CEO Michael Kneeland had this to say on the latest earnings call:
“For the full year of 2015 we delivered a record amount of adjusted EBITDA of $2.8 billion and a margin of 48.7%, which is the highest in our company's history. And our free cash flow came in at $919 million after capex, which was also a record and we do expect to create about the same or more in 2016. We plan to utilize this cash flow to buy back shares and pay down debt this year.”
Kneeland also acknowledged the headwinds going forward.
“As we look to 2016, the headwinds are still with us. There are also some evident macro constraints such as pressure on industrial activity, the Canadian economy as well as some unknowns. But underneath these dynamics, the non-residential construction markets are continuing to recover. And that's a key point. The equipment rental industry is continuing to grow. That’s why if you asked me where we stand on our operating environment, there’s really two answers to that. One has to do with the short-term, meaning 2016, and the other is longer-term relating to the rental cycle. Short-term, our stance is to be cautious on CapEx and proactive about pursuing profitable growth opportunities in areas, such as specialty services.”
Risk reward
Free cash flow of $1 billion after capex is a huge improvement and much needed. United Rentals has more than $8 billion in long-term liabilities and less than $180 million in cash. Of course, the need for cash sitting in the bank is low since they have a subscription-type model with high cash generation.
United Rentals will be around as long as construction companies need heavy machines to do their work. The question becomes, can URI grow at 7% a year, and will the cash flow be used wisely to strengthen its position and increase shareholder value through buybacks and increased earnings? The company still has not figured out how to grow book value, which puts them off my buy list, but that doesn’t mean the stock won’t see $100 in the next three years.
Conclusion
The company does not pay a dividend, it has a one-star business predictability rating from GuruFocus and a fair value of $65, which would be raised to $96 if United Rentals earns $9 in 2016. Guru David Tepper (Trades, Portfolio) still has over 1.25% of his portfolio in United Rentals despite reducing his stake in his latest filing. If nothing else, matching Tepper’s position (1.25%) with your own portfolio wouldn’t be a bad idea.
