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United Rentals (URI) Up 52% in 6 Months: More Room to Run?

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United Rentals URI is making the most of the high demand for its specialty construction products, used equipment and mixed bag of rental fleets. Business acquisition are an important part of United Rentals’ growth strategy.

Shares of United Rentals have gained 52.3% over the past six months versus the industry’s 27% growth. Further, upward revision of earnings estimates for 2021 indicates analysts’ confidence in the company’s potential. Over the past 60 days, the Zacks Consensus Estimate for its 2021 earnings has risen 2.2% to $16.96 per share. Apart from signifying analysts’ positive sentiments, this justifies the company’s Zacks Rank #2 (Buy), indicating strong fundamentals and expectation of outperformance in the near term.


Major Growth Drivers

Inspiring Earnings Beat Trend: The company has an outstanding earnings and revenue surprise trend. Out of the last 29 quarters, its earnings exceeded the consensus mark in 27. Revenues estimates, in the meanwhile, exceeded analysts’ expectations in the trailing 14 quarters. In spite of the COVID-19 pandemic affecting industrial business, rental revenues grew sequentially in 15 out of 16 of its service zones for the third quarter. Fleet productivity improved sequentially in the third quarter of 2020 by 560 basis points, primarily on better fleet absorption.

The company is focusing on cutting down on capital expenditure and anticipates 2020 net rental capital expenditures after gross purchases in the range of $100-$150 million. Hence, free cash flow is anticipated in the range of $2.2-$2.3 billion, which suggests an increase from $1.59 billion reported in 2019.

Superior ROE: United Rentals’ return on equity (ROE) is indicative of growth potential. The company’s ROE of 34.2% compares favorably with the industry average of 11.1%, implying that it is efficient in using its shareholders’ funds.

Inorganic Drive: Acquisitions act as a catalyst for United Rentals. Notable acquisitions like BakerCorp, BlueLine and WesternOne Rentals & Sales LP have extended its services to Alberta, British Columbia, Manitoba as well as North America.

Robust End-Market Demand: United Rentals has been seeing steep demand for equipment rental, majorly in three end markets in North America — industrial and other non-construction, commercial construction, and residential construction. For the first nine months of 2020, equipment rentals represented almost 85% of the company’s total revenues.

Also, the company is experiencing high demand for specialty construction products, which have been positively impacting the company’s earnings. Also, after the relaxation of pandemic-related restrictions, demand for used equipment has remained solid.

Diverse Rental Fleet: United Rentals’ mixed bag of rental fleet helps it serve a large number of customers across the industry. It supervises rental fleet in such a way that it can optimize utilization and focus on customer satisfaction. As of Sep 30, 2020, the company’s fleet of equipment rental had total original equipment cost or OEC of $14.2 billion.

Meanwhile, by increasing the mix of Specialty (which includes higher-margin trench, power and fluid solutions) in the portfolio, the company is expected to boost margins. Over the past five years, Specialty’s contribution has increased from less than 7% to nearly 27% to its pro-forma revenues.

Other Key Pick

Other top-ranked stocks include GCP Applied Technologies Inc. GCP, Construction Partners, Inc. ROAD and Armstrong World Industries, Inc. AWI. While GCP Applied Technologies and Construction Partners carry a Zacks Rank #1 (Strong Buy), Armstrong World carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

GCP Applied Technologies, Construction Partners and Armstrong World’s earnings for 2021 are expected to increase 21.9%, 16.7% and 9.4%, respectively.

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