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United Rentals (URI) Down 13.7% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for United Rentals (URI). Shares have lost about 13.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is United Rentals due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

United Rentals' (URI) Q2 Earnings Top Estimates, View Cut

United Rentals’ adjusted earnings of $4.74 per share in the second quarter 2019 beat the Zacks Consensus Estimate of $4.48 by 5.8% and increased 23.1% from the prior-year figure of $3.85.

Revenues

Total revenues of $2.29 billion surpassed the consensus mark of $2.27 billion by 1.1%. Moreover, revenues rose 21.1% year over year.

Rental revenues (including revenues from owned equipment rental, re-rent and ancillary) were also up 20.2% (increasing 4.8% on a pro-forma basis) from the year-ago quarter to a record $1.96 billion, buoyed by solid impact of BakerCorp and BlueLine acquisitions. The pro-forma improvement reflects growth in construction end markets served by the company.

Fleet productivity was down 3.1% year over year in the quarter, mainly due to the impact of BakerCorp and BlueLine buyouts. On a pro-forma basis, fleet productivity was up 0.7% from the prior-year quarter, attributable to improvement in rental rates and fleet mix, partially offset by a decline in time utilization owing to integration of the recent acquisitions, as well as adverse weather.

Notably, Fleet productivity aggregates the impact of changes in rates, utilization and mix on owned equipment rental revenues.

Segment Discussion

General Rentals: Segment equipment rentals’ revenues increased 14.6% year over year to $1.53 billion. Moreover, segment equipment rentals’ gross profit rose 9.2% from a year ago to $593 million. However, gross margin contracted 200 bps year over year.

Trench, Power and Pump: Segmental equipment rentals revenues increased 44.8% year over year to $433 million. Equipment rentals gross profit rose 37.2% to $199 million, while gross margin declined 250 bps on a year-over-year basis. The downside was mainly due to the impact of the said acquisitions.

Overall Margins

The company’s total equipment rentals gross margin dropped 180 bps year over year to 40.4%.
Nevertheless, adjusted EBITDA increased 18.3% from the prior-year quarter to a record of $1.07 billion. However, adjusted EBITDA margin contracted 110 bps to 46.9% in the quarter, owing to the impact of the completed acquisitions. On a pro-forma basis, EBITDA margin advanced 40 bps.

Balance Sheet

United Rentals’ cash and cash equivalents totaled $75 million as of Jun 30 compared with $43 million in the corresponding period of 2018.

In the quarter, the company generated $923 million as net cash from operating activities, reflecting a decrease of 8.3% from the year-ago period.

Free cash flow was $205 million in the quarter (up 9.6% year over year).

Share Repurchase Program

In the first two quarters of 2019, United Rentals repurchased $420 million worth of stocks and reduced share count by 2.1% year over year. As of Jun 30, 2019, the company repurchased $840 million of common stock under its $1.25-billion share repurchase program.

2019 Guidance Updated

Total revenues are expected in the range of $9.15-$9.45 billion (versus $9.15-$9.55 billion expected earlier), indicating an increase from $8.05 billion in 2018. Adjusted EBITDA is projected between $4.35 billion and $4.5 billion (versus $4.35-$4.55 billion projected earlier) compared with $3.86 billion in 2018. Net rental capital expenditures after gross purchases are projected in the range of $1.3-$1.4 billion compared with $1.442 billion in 2018. The company had earlier expected the same within $1.4-$1.55 billion. Net cash provided by operating activities is maintained in the range of $2.85-$3.1 billion ($2.85-$3.2 billion was projected earlier) versus 2.85 billion reported in 2018. Free cash flow (excluding the impact of merger and restructuring-related payments) is now expected in the range of $1.4-$1.55 billion compared with $1.3-$1.5 billion of prior expectation. The current guidance for the metric suggests an increase from $1.33 billion reported in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, United Rentals has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, United Rentals has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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