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Revisiting United Rentals

- By Jonathan Poland

I've covered United Rentals (URI) for a number of years now, in articles here, here and here. But with the stock down 40% from its peak last March, it is still presenting investors with an excellent buying opportunity at this price point.


United Rentals is the go-to firm for lifts, air compressors, generators, track loaders and excavators -- all the heavy machinery necessary to develop or redevelop land. The company has also made it easy to order these rentals directly on its website. Construction projects take time, which is what United Rentals wants because more time means more recurring revenue on its rentals.

United Rentals continues to benefit from the construction and development happening across the U.S. It enjoys very healthy gross profit margins of 41%, generates return on equity in excess of 33%, and continues to grow its book value at better-than-market rates. The company has 13% of the market, almost double the share of its top competitor Sunbelt, and over 77% of the industry is fragmented into much smaller businesses. And, it has already been on a buying spree with its late 2018 all-cash acquisition of BlueLine, which added 46,000 units of general rental equipment and a branch network that recently totaled 114 locations.

Anyone worried about a housing slowdown shouldn't be harmed with United's stock since less than 5% of its customers are focused on residential construction. Of course, an overall economic slowdown would hurt it as the majority are either building manufacturing plants or using its equipment for commercial projects. However, even in down markets, buildings are still constructed.

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Even better news for shareholders is that a growing number of large multi-year construction projects bode well for United Rentals in the coming years. The company is providing equipment for overhauls and expansions at several major airports, including the $14 billion project at Los Angeles International (LAX) -- a project that could last until 2025. It is also a key partner in a massive liquefied natural gas facility being built in British Columbia that will likely not be finished until late 2023.

The company has grown its earnings per share at more than 18% a year for the last decade and with such a big chunk of the market available, United Rentals is sure to help in the consolidation. While construction spending is below historical averages, the need for infrastructure spending and metropolitan redevelopment remains high. More importantly, developers don't want to buy this equipment and build support staff to house it and maintain it, which means United Rentals will be in business for as long as construction projects require this type of equipment.

In 2019, the company is expected to earn north of $19 per share, which puts the forward earnings multiple at 6x. Its historical multiple is closer to 20x. Split the difference and investors getting in now may still see $250 per share in the coming years, a double from today's price.

Disclosure: I am not long or short United Rentals.

This article first appeared on GuruFocus.