Value Investing Congress: Don’t Buy This Recovery

Wyatt Investment Research

Mick McGuire leads Marcato Capital Management, where is focuses on passive and activist investments in undervalued stocks. He’s a proven value investor who previously worked with Bill Ackman at Pershing Square.

At the Value Investing Congress today, he presented one of his favorite investment ideas. His firm owns nearly 5% of the stock in this company that he views as a play on the recovery of the construction market.

Recommends: United Rentals (URI) - $56 per share

  • $6 billion market cap
  • Largest equipment rental company
  • 400,000 units of equipment for rent (i.e. forklifts, earthmoving machines, aerial work platforms)
  • 2012 acquired #2 company in sector
  • Operates in U.S. and Canada
  • Pure play on the North American commercial construction recovery
  • Residential construction is just 4% of their revenues (versus 47% commercial, and 39% industrial)
  • Cyclical trends are positive, secular trends provide additional tailwind
  • Customers are choosing to rent, rather than buy equipment
  • U.S. construction (total) is 26% below peak of 2006
  • Construction spending is trending up 7.5% year-over-year
  • Strong housing starts are up; a leading indicator for non-residential construction
  • Housing starts remain 40% below the normal long-term average of 1.5 million units per year
  • Expect rising demand for rental of equipment
  • Company: never seen more demand from customer base
  • Think of this as “renting the recovery”
  • Rental penetration rate has increased from 5% in 1993 to 50% today
  • Rental of equipment is far more economical and affordable
  • 2012 – 2015: Compound annual growth of 9.7%
  • Company has 15% share of the market
  • National footprint allows company to target larger companies
  • 2005 to 2011, reduced store redundancies by combining locations
  • EBITDA margins of 46.1%
  • Possibility for share repurchases
  • Average of 5.2x EBITDA over history
  • Trades at 5.6x EBITDA and 12x current year earnings
  • Stock is fairly valued based on current business
  • But valuation fails to price in where we are in the economic cycle
  • Estimated 5.5x 2015 EBITDA estimate
  • Share price target: $96 per share – 75% premium to current price


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