Inside Wall Street: Strong upside at United Rentals

The world's largest equipment rental company is a hidden positive play in fragile US economic recovery.

By Gene Marcial Aug 6, 2012 3:36PM

Image: Construction (© Photodisc Green/Getty Images)Even with the U.S. still waiting for the elusive economic boom, United Rentals (URI) should experience a potentially huge positive business blast of its own starting later this year and into 2013 that would double sales, operating earnings and lines of available equipment.


That's because the somewhat tenuous economic recovery in the U.S. is encouraging many companies to opt for renting rather than buying badly needed heavy and light construction and industrial equipment.

United Rentals, the largest rental-equipment company with an integrated network of 969 locations in 48 states and 10 Canadian provinces, rents and sells equipment to a diversified customer base that includes industrial, manufacturing and construction companies as well as government agencies and individual homeowners.


The dynamics for growth at United Rental have also improved with its April acquisition of smaller rival RSC Holdings. The deal boosts by about 50% United's units of equipment available for rent as the integration of RSC helps it diversify and get exposure to the industrial market.

Equally important, the RSC purchase enhances United's revenue and bottom line. Standard & Poor's Capital IQ forecasts United's operating earnings will nearly double in 2012 to $3.48 a share from 2011's $1.87, and then nearly double once again in 2013 to $5.22.

Yet United’s stock has yet to reflect these impressive numbers and in fact dropped to $27 a share on July 25, partly because of the RSC acquisition and second-quarter results that failed to excite Wall Street. The stock has since inched up to $31, but it's still way down the $46 it perched at in late April.

S&P Capital IQ analyst Jim Corridore, who rates the stock as a "strong buy," figures the stock is way undervalued, and has a 12-month price target of $52 a share. The target represents a big lift in United's price-to-earnings ratio to 10 times his 2013 earnings forecast of $5.22 a share. That P/E multiple, however, is still at the lower end of United stock's 10-year range.

Corridore sees more upside P/E potential ahead. "Given our view that we are near the start of a cyclical earnings upcycle, we think the valuation will see multiple expansion," says Corridor.

United Rentals CEO Michael Kneeland sees a growing customer appreciation for the economic value of rental equipment. "Our markets are more robust than a year ago," he says, noting that the company's strong results in the second quarter were driven by positive factors that he says should continue.

"In addition, we capitalized on our enhanced market position following the acquisition of RSC, particularly in the industrial sector," says the CEO in a statement related to the company's second-quarter results. The higher rates and volume the company achieved in the second quarter reflect continued demand for United’s equipment, says Kneeland, and "we feel confident with our financial targets for 2012," which reflect the company’s flexibility in addressing changes in economic circumstances.

One big advantage in United's operations is it doesn’t have any exposure to European markets. "United is the clear leader in an industry with secular drivers, no exposure to Europe, and a domestic cyclical construction tailwind to come," says Seth Weber, analyst at RBC Capital Markets, who rates the stock as "outperform" with a 12-month price target of $50.

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money's Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.



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