United Rentals: A company that targets new sectors
Last quarter, United Rentals, Inc. (NYSE:URI), the world’s largest equipment leasing and rentals company, surpassed earnings consensus estimates again, for a sixth consecutive quarter. Revenue rose by 68% to $1.1 billion and EPS, by 12%, to $0.19. This growth is expected to continue as the firm targets sectors that are currently recovering, namely the industrial, construction, manufacturing and utility homeowner segment, alongside government entities; also, customers are increasingly tending to rent equipment over buying it.
The company has attracted the attention of several funds recognized by their returns on investments, like the Vanguard, Fidelity and BlackRock funds. I, like them, would recommend buying this stock, even despite its valuation of 69 times P/E rate (don’t worry, forward P/E is only 9.3 times ), principally based on its long-term growth potential, expected at over 20%, about 25% above the industry average.
The acquisition of RSC Holdings last year further expanded the firm’s presence in North America and substantially increased synergies, reducing costs and helping drive revenue growth over the last couple quarters. The purchase also allowed the company to add higher margin clients to its base; this has resulted in consistently increasing EBIDTA margins that are expected to top 46% this year.
Furthermore, last quarter, the company generated and extra $123 million in revenue from used equipment sales at a gross margin of 43.9%. The same period last year had registered $125 million of proceeds at a gross margin of 39.2%. This was a good start for what the management believes to be a pivotal year. In the last conference call, CEO, Michael Kneeland, portrayed an encouraging outlook for 2013. He assured that as United Rentals, Inc. (NYSE:URI)´end markets recover, opportunities to gain ground with key accounts of all types and specialty rentals abound. In order to capitalize on over $1 billion of net fleet purchases, it plans to expand its sales force by at least 10% before 2014 while continuing “to drive cost efficiencies and further lower (…) debt leverage.”
Its significant debt balance and weak liquidity position remain as concerns for shareholders. Nevertheless, if EPS and revenue keep surpassing estimates and if the momentum expected later this year actually comes through, I forecast strong upside for investors, even despite the elevated stock price. Consider buying; the profit potential is much as the construction market recovers.
Based on valuation and growth prospects my choice of investment would be Avis Budget Group Inc. (NASDAQ:CAR). Although Hertz Global Holdings, Inc. (NYSE:HTZ) and United Rentals, Inc. (NYSE:URI) are expected to deliver higher EPS growth rates over the upcoming years, Avis also is a dominant player in the segment while its stock trades at considerable discount to its peers. Entry points are open, make the best of them by purchasing this stock.
The article Is Rental Service a Good Business? originally appeared on Fool.com and is written by Victor Selva.
Victor Selva has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings. Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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