United Rentals: Still Good To Own This Rental

seekingalpha11-22 11:40

United Rentals has shown strong performance, with its stock up over 40% this year, and continues to demonstrate robust operational growth and financial health.Despite modest market share gains, United...

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The stock is up over 40% and operationally it is on track for another great year. With its stock close to record highs, it is worth evaluating if at this moment United Rentals is worth buying or to keep it on your watchlist. From my perspective, it is still a buy. Intro It has been about four years since I last covered United Rentals and for those who want to get a further introduction to the company and its business model, they can read it here. Over that period, this 'boring' rental equipment company has delivered a stellar total performance of about 345%. At that time it was also trading near its all time high, so it is a great example that a record share price does not have to hamper future returns. Personally, I held the stock and added some on several occasions. Now, United Rentals is a proper large cap and since last year it has also started paying a quarterly dividend. From that perspective it can now be seen as a mature company, however that does not mean that the spectacular returns are a thing of the past. There are still plenty of elements that can propel the stock to greater heights. Data by YChartsWhen looking at the chart above, the most interesting fact to me is how the performance held up during the rate cycle, as seen below:   FREDSource: FRED Since financing is such a key part of the business model of rental equipment companies, it is somewhat amazing that when financing costs went up, the performance of United Rentals followed. To me, this is a clear indication of the market strength and pricing power it has in its industry. Moving beyond the share performance, let's delve deeper into operational developments. Developments A thing that stood out to me when researching this follow-up article, was the fact that United Rentals did not gain significant market share. In 2020, they held 14% of the market, and now it has grown slightly to 15%:   Ashtead GroupSource: Ashtead IR Interestingly enough, competitors Ashtead (OTCPK:ASHTF, OTCPK:ASHTY) and Herc (HRI) also just managed to capture another percent of the market each. At the time, parties such as Ashtead expected further consolidation in the sector, and they are still expecting it. However, this seems to progress, maybe not as quickly as one might assume. Luckily, the rental market size is steadily increasing, providing a tailwind for these companies:   Ashtead GroupSource: Ashtead IR If we examine the financial statements of United Rentals, it becomes clear that operationally it is delivering growth in all the relevant areas. Do note that in case it is not mentioned, the columns are from left to right, TTM to Dec 2020.   Seeking AlphaSource: Seeking Alpha Revenue has been growing at a rapid clip, with the cost of revenues as a percentage being rather steady.   Seeking AlphaSource: Seeking Alpha Looking at the earnings from continuing operations, 2020 is an outlier and to a lesser extent the same goes for 2021. The obvious reason is Covid. Interestingly enough, the TTM interest expense is almost similar to 2020 when rates were much lower. To me, that's a good indication that the debt load and expenses are well managed by the business. The bottom-line shows precisely what you would expect, increasing in lockstep with the additional revenue per period.   Seeking AlphaSource: Seeking Alpha A glance at the share metrics reveal that United Rentals has been buying back its stock and like said earlier, has started paying out a dividend. To be honest the dividend is rather modest, but given the fact that the company is growing, the dividend requires little cash and the number of shares are being reduced, I expect United Rentals to be able to boost this considerably over the next couple of years. The EPS over the last twelve months is more than 300% higher than 2020, but again, this might not be a perfect match-up. From a balance sheet perspective, there is an overall expansion, but there are just a few lines that are worth mentioning.   Seeking AlphaSource: Seeking Alpha Book value is trending upwards, but most importantly, the amount of net debt as compared to the total equity has grown much less. In percentages, total equity grew by almost 90%, while net debt increased at less than 40%. And as could be seen on the income statement, the net increase in interest expenses was very minimal. So it is safe to say that even though United Rentals delivered this superb performance, it improved its balance sheet. Going forward, this gives the company more optionality on M&A, expansions or capital return programs. As displayed in their Q3 earnings presentation, the balance sheet is one of the best shapes it has been in over a decade:   United Rentals IRSource: United Rentals IR In most of my articles, I highlight the cashflow of a business as the area I am most interested in. And in the case of United Rentals, this is not an exception. Especially because its cashflows are substantially higher than its net income. As compared to certain other industries, there are lines here that warrant a bit of further clarification. The nature of the rental industry means that it acquires lots of capital assets to rent out, but also that these players are large sellers.   Seeking AlphaSource: Seeking Alpha Cash from operations has almost doubled over the period, and at the moment it is eleven times United Rentals market cap of around $54 billion. So by all means, not expensive, but it has traded cheaper in the past. The most important elements here, I would say, would be the capex and the two lines related to the sales of property, plant, and equipment and gains from sale of assets. Most of the capex relates to rental equipment, and a growing number should translate in future growth. The income from the sales in selling off older equipment. A growing net number here is what I'd like to see. Given the size of the TAM and its growth makes that in this industry it is possible to plow back large amounts of capital. Together with the cashflow rich business model, it is what makes this such a classical compounder. Besides that, it is pleasant to see that after 2020, United Rentals was making acquisitions again. Remember, this did not deteriorate the strength of the balance sheet. All in all, the financial statements are testaments to United Rentals operational strength and are very comforting looking forward. Valuation The total return since my last article has not just come from operational growth. Multiple expansion has also boosted the share price. When taking a snapshot of the relevant multiples, they are clearly above the 5-year average of the company itself. So it is not a screaming bargain at these levels.   Seeking AlphaOn every multiple, it is now priced significantly higher. Also, compared to competitor Herc it is more expensive. The comparison with Ashtead is more of a mixed bag. Given that Herc is smaller and less successful, a discount is warranted for them, Ashtead is most likely the best peer to stack United Rentals up against and this shows in the pricing of both. Still, looking at the improved balance sheet and cashflow profile, United Rentals is not expensive. Risks Following up on the current valuation, there is a risk that the stock reverts to its average multiples, which would be significantly lower. Given that much of the rental equipment is tied to the overall economic activity, a slowdown in that area could send the shares lower. In my previous article I mentioned that the debt, refinancing and rates could be a risk. However, the last few years have proven that this risk is almost completely negated. This could change, but personally, I am rather comfortable with how it is managed. Supply chains are also a major risk for United Rentals due to the reliance on several large providers. So far, this has also proven to be not much of a factor and the more the business grows, the more symbiotic these relations will become. Opportunity In some investment cases, there can be certain catalysts perceived. Such as pending takeovers or a new patent grant. In this case, one can't really speak of one big force that will generate the returns. In large because the company is so diverse and rents to many industries. As long as these thrive and grow, United Rentals will grow. And if there is a downturn, the strong balance sheet allows for large acquisitions, increasing market share inorganically. So, in short, this is a hypothesis that involves seeing a company executing well and expecting them to continue what they have been doing so successfully. This is not a trade, this is buying and sitting on your hands. Conclusion  United Rentals is the largest rental equipment company in the world and getting larger. It spits out cash and is able to use that to grow, organically and inorganically. It even has ample opportunity to use that cash to reward its shareholders with buybacks and dividends. Since my initial article, nothing indicates that they will stop compounding. On the contrary, everything points to further growth. While it is trading above its historical multiples, it does not stop United Rentals from being a good investment. 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