United Rentals Inc. URI has surpassed my original price target from 2016, but continues to offer investors incredible upside potential, especially since the stock is down more than 30% since the end of summer. If you owned in the $170 range, I think it's only a matter of time before the company is valued at that per-share price again.
United Rentals is an equipment rental company with a range of products, including aerial work platforms, earth-moving equipment, forklifts, light towers and generators, plumbing equipment, pumps, power tools, trucks and trailers and welders.
A big catalyst for the recent price drop is data from existing home sales, which have dipped below 2013 levels thanks to hurricane season and higher interest rates. This has punished U.S. home builders like KB Home KBH and Toll Brothers TOL, which are each down almost 40% year to date. Ancillary service providers in the housing industry like United Rentals are simply caught up in the storm. This is a classic example of how irrational the market can be on both the upside and downside.
United Rentals has invested billions in the last year to complete acquisitions and expand its fleet. The company has already completed three major buyouts - NES, Neff and BakerCorp. In September, it announced another big deal, offering $2.1 billion for BlueLine Rental. The Houston-based private equity-backed company adds more than 46,000 units of general rental equipment through 114 locations across the U.S., Canada and Puerto Rico. BlueLine generated $258 million in earnings before interest, taxes, depreciation and amortization on $728 million in sales. To be fair, paying 8 times pretax earnings seems a bit high, but consolidating the industry means better long-term growth prospects for United Rentals. The deal is supposed to close by the end of 2018.
Despite being number one in North America, its share is just 11% of the market, with 79% fragmented across a broad range of companies. That's a big gap to fill. One that the company seems to want to close. The risk is it will use too much debt to acquire smaller competitors at prices that are too high and not accretive to its value proposition. Investors should stay hopeful that management's deal-making decisions are good for the company as long as earnings continue to grow.
More importantly, the current acquisitions will bear fruit in United's quarterly statement sooner rather than later, and the recent pullback simply gives investors an opportunity to continue buying at an undervalued price. Nothing has changed from an earnings perspective. By the end of 2019, United Rentals will likely be earning over $17 a share. I will be shocked if the market continues to price its stock below 10 times earnings. At 10 times earnings on $17 a share, the share price would be $170 by 2020.
From a dollar-cost averaging standpoint, if you bought 100 shares at $170, using the same investment, you could pick up roughly 150 at its current price. That brings your cost down to $137 per share. If the company earns $17 per share (as expected) and valued at a price-earnings ratio of at least 10, then by 2020, investors' dollar-cost averaging would be up 24% plus dividends.
Disclosure: I am not long or short URI.
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