Our rating on United Rentals Inc. (NYSE: URI) is BUY with a revised target price of $195. United Rentals is the largest rental equipment company in the world, with a store network nearly three times the size of any other provider in the fragmented industry. We are comfortable with this well-managed company’s ability to navigate COVID-19 as well as its adoption of newer technology in order to navigate a post COVID-19 world. On the fundamentals, URI trades at 10-times our 2021 estimate, compared to a five-year range of 6-14.
The beta on URI is 2.3.
On October 28, URI posted adjusted 3Q20 EPS of $5.40, down 10% year-over-year but above the consensus forecast for $4.35. Total 3Q20 revenue fell 12% to $2.2 billion. The adjusted EBITDA margin increased 90 basis points to 49.4%.
The new total revenue outlook is $8.35-$8.45 billion, up from the prior outlook for $8.05-$8.45 billion. The new adjusted EBITDA outlook is $3.825-$3.875 billion, up from the prior outlook for $3.6-$3.8 billion, which compares to $4.4 billion in 2019 and $3.9 billion in 2018.
EARNINGS & GROWTH ANALYSIS
In 3Q, Fleet Productivity declined 8.0% — an improvement from the 13.6% decline in 2Q20 –as overall revenue declined 12%.
The company has two operating segments: General Rentals, which includes the rental of general construction and industrial equipment, aerial work platforms, and general tools and lighting equipment; and the Trench, Power and Fluid business, which includes the rental of specialty construction equipment such as trench safety equipment, power and HVAC equipment, and pumps that are used by industrial, mining, construction, and agribusiness customers.
In General Rentals, third-quarter revenue fell 15% to $1.4 billion. The gross margin in this segment fell 190 basis points to 39.0%, more than entirely due to depreciation expenses. The 3Q20 gross margin in this segment rose 110 basis points to 49.8%.
In 3Q, the adjusted EBITDA margin widened 90 basis points to 49.4%. The gains reflect the company’s actions to manage costs during the pandemic.
FINANCIAL STRENGTH & DIVIDEND
S&P rates URI’s credit as BB/stable, below investment-grade but up from a prior BB-/positive. Moody’s no longer rates URI’s credit.
URI is highly leveraged, with $10.0 billion. URI had cash of $174 million.
Margins are high; the company’s EBITDA margin in 3Q was 49.4%. ROIC was 9.2%.
The company has not paid a cash dividend since its inception, and we do not expect any payments in 2020.
MANAGEMENT & RISKS
Matthew Flannery is the company’s President and CEO. Former CEO Michael J. Kneeland is the Chairman of the Board. Bobby Griffin, a member of the board for 10 years and the chairman of the Strategy Committee, is now lead independent director. Dale Ashlund became the COO in May of 2019.
URI investors face risks. These include the company’s highly cyclical business, significant debt, and exposure to the oil and gas industry. The company must also spend heavily to expand and maintain its fleet of rental equipment.
United Rentals is the largest rental equipment company in the world, with a store network nearly three times the size of any other provider, and locations in 49 states and all Canadian provinces. The company has over 19,000 employees and approximately 1,170 rental locations in the U.S. and Canada and 10 locations in Europe.
On the fundamentals, URI trades at 10-times our 2021 estimate, compared to a five-year range of 6-14. They are trading at a price/sales ratio of 1.4, near the high end of the historical range. Based on these generally favorable multiples – as we note that sales and earnings are abnormally depressed — we are maintaining our BUY rating. Our new target price is $195.