Goldman Sachs is highlighting an intriguing industry for investors looking for compelling stock picks in the current climate. “We believe [U.S.] construction equipment supply has peaked [and] rental rates are likely to bottom in coming quarters,” Goldman Sachs’ Jerry Revich wrote in a research report on Friday. “Multiple expansion is likely for the construction rental group if OEM [original equipment manufacturer] production cuts play out in coming quarters as we expect.”
As a result the analyst has just made the bold move of upgrading several key names. Here we take a closer look at three of the stocks recently upgraded by Revich. “We were negative on the [rental] end market since April 2018,” he commented, but “we now have more Buys than Sells across our Machinery & Diversified Industrials coverage.”
Encouragingly, other analysts appear to share this bullish outlook on these three stocks- as reflected in the Strong Buy Street consensus and sizable upside potential for each stock covered below. Let’s dive in now:
United Rentals, Inc.
One stock now on Goldman’s buy list is rental giant United Rentals (URI – Get Report). The company claims about 13% of the North American market share. Although the stock is down 26% on a one-year basis, since the beginning of the year shares have surged 23%. Now Goldman Sachs analyst Jerry Revich has upgraded URI to Buy from Hold, while raising his 12-month price target for the shares to $165 from $128. This new price target suggests 30% upside potential lies ahead.
“We appreciate investor concerns around weak used equipment values, declining construction equipment backlogs, and elevated dealer new equipment inventories,” he wrote. “However, we believe the second derivative for the oversupply picture is turning.” In other words, things are getting worse at a slower rate. As a result, Revich believes URI’s cyclical risk/reward is improving- and he is also optimistic about the focus on reducing financial leverage and "continued progress" on reducing per unit operating costs.
Goldman Sachs isn’t the only firm making bullish moves on URI right now. Top Citigroup analyst Timothy Thein has just added the stock to Citi’s Focus List of best ideas. With a $160 price target, the analyst believes United Rental offers a "compelling" risk/reward right now. URI should become less volatile going forward says Thein, as: 1) the company generates significant cash throughout the cycle; and 2) it has meaningfully improved its balance sheet.
In fact, if we look at the overall analyst consensus it comes out at a cautiously optimistic Moderate Buy. But if we zero in on ratings from only best-performing analysts, the consensus shifts to Strong Buy. That’s with an average analyst price target of $154 (22% upside potential).
Herc Holdings Inc
Herc Holdings (HRI – Get Report) is one of the largest equipment rental companies in North America. And the stock is buzzing right now. Shares surged 8% on Friday after Goldman’s Revich double-upgraded HRI from Sell to Buy. He also significantly increased his price target from just $37 all the way to $60. Revich cited the company's operational turnaround for his new bullish rating, including a shift towards higher return product lines.
Thanks to the recent spike the stock has now put on a tremendous 88% year-to-date rally- climbing 19% so far this month. Nonetheless on a one-year-basis, HRI is currently trading down 7%. And Herc still trades at just 10.4 times estimated 2020 earnings. In comparison, industrial components in the S&P 500 trade for about 15.5 times estimated 2020 earnings.
Only three analysts have rated HRI in the last three months; and all three analysts rate the stock a buy. The average price target of these analysts works out at $61 (24% upside potential). Buckingham Research’s Neil Frohnapple is the most bullish of the pack. After hosting HRI investor meetings, he reiterated his Street-high $70 price target.
The analyst stated "The company remains bullish on the outlook for its end markets based on conversations with customers, which is consistent with the findings in our recent rental survey. We also think the company's rental rate growth should continue to outpace industry performance, and believe there is meaningful opportunity to improve time utilization in 2H19/2020".
When it comes to recurring revenue, railroad manufacturing giant Wabtec (WAB – Get Report) is a top pick for Revich. In August, the analyst upgraded Wabtec from Hold to Buy while ramping up his price target from $84 to $89 (20% upside potential).
“Wabtec’s end market has already corrected,” states Revich. He believes headwinds are understood by investors and sees exposure to end market as approaching a trough. Indeed, shares are down 30% in the last one year, but are currently rallying 7% so far this month.
The analyst tells investors, “Wabtec has among the highest recurring revenue and margin profiles in our [coverage].” Plus the GE Transportation integration is off to a strong start. Wabtec completed its $11 billion merger deal with GE Transportation (a unit of GE) back in February.
Interestingly, KeyBanc has now followed Goldman Sachs’ bullish lead. Five-star analyst Steve Barger upgraded WAB from Hold to Buy on September 16. His price target is marginally higher at $90 (22% upside potential).
Meanwhile Cowen & Co’s Matt Elkott writes: “We continue to favor WAB, our top Smidcap idea.” In 2Q19, the company demonstrated solid execution in a soft North American market, notes Elkott. WAB beat expectations top to bottom, raised EPS guidance modestly, and raised cash flow guidance materially.
This gives the stock a Strong Buy top analyst consensus (with the consensus of all analysts at Moderate Buy). The average analyst price target stands at $89.