Shares of United Rentals, Inc. (URI) rose as much as 3.6% following the rating upgrade from Moody’s Investors Service, the rating unit of Moody's Corporation (MCO). The upgrade mainly reflects the improvement of United Rentals credit quality and the expectation of continued revenue growth.
United Rentals now enjoys a Corporate Family Rating (CFR) of B1 that was raised from B2. The new rating is attributable to the company’s economies of scale, product breadth, diversified customer base and market position.
United Rentals’ Probability of Default Rating (:PDR) was lifted to B1-PD from B2-PD. Moody’s also upgraded United Rentals’ senior secured notes rating to Ba2 from Ba3, senior unsecured debt rating to B2 from B3 and senior subordinated notes rating to B3 from Caa1.
These upgrades came on the back of improved leverage. According to Moody's, adjusted basis, the ratio declined from 4.6 times as of Dec 31, 2012, to 3.9 times as of June 30, 2013. The rating agency remains optimistic about leverage to further decline to the mid 3 times area over the next 12–18 months. This is also in line with the United Rentals’ target leverage range of 2.5–3.5.
United Rentals’ Speculative Grade Liquidity (SGL) Rating was affirmed at SGL-3, revealing that the company will maintain an adequate liquidity in the near term. SGL-3 also reflects feasible near-term debt maturities and revolver availability under its $1.9 billion ABL credit facility due 2016.
The ratings outlook was changed to stable from positive. United Rentals' stable ratings outlook reflects the expectation for modest improvement in its credit metrics balanced against cyclical business risks and high leverage.
United Rentals’ total revenues improved 22% year over year to $1.2 billion in second-quarter 2013 mainly due to growth in the sales of rental equipment and an increase in equipment rentals. Gross margin expanded 240 basis points (bps) to 47% in the quarter. In addition, operating margin increased 350 bps to 26.5%.
Moody’s feels the company has made significant progress because of improved demand and the successful integration of RSC Holdings acquired in 2012. Moreover, the rating agency acknowledged further improvement in its operating margins, EBITDA margins, leverage and interest coverage.
However, the rating agency is apprehensive of continued uncertainties in the sustainability of rental demand and United Rentals’ willingness to allocate capital for stock repurchases. Moody’s also remains cautioned about a large capital investment program which increases its rental base at the expense of weaker short-term cash flows and its cyclical business including non-residential construction.
Greenwich, CT-based United Rentals is the largest equipment rental company in the world, with an integrated network of 830 rentals. The company offers for rent about 3,300 classes of equipment with a total original cost of $7.23 billion.
United Rentals currently retains a Zacks Rank #3 (Hold). Other companies in the building and construction industry with favorable Zacks Ranks are CaesarStone Sdot-Yam Ltd. (CSTE) and Masco Corp. (MAS). Both hold a Zacks Rank #1 (Strong Buy).