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Why You Should Add United Rentals (URI) to Your Portfolio Now

United Rentals, Inc. URI is poised to benefit from robust end-market demand (including Canada), prudent investments in fleet and accretive acquisitions.

However, its shares have suffered owing to trade tensions, similar to other construction stocks. Investors are vexed about escalating global trade tensions, as the Trump administration uses tariffs to close its trade deficit, particularly with China. This has dampened investors’ sentiments throughout the year. Trade disputes with China have resulted in supply-chain disruptions, eating into corporate profits and in turn showing on stock performance. Over the past six months, shares of United Rentals have lost 32.3% compared with a decline of 31.2% of the Zacks Building Products - Miscellaneous industry and 23.8% of the Construction sector. United Rentals shares space with PGT Innovations, Inc. PGTI, NCI Building Systems, Inc. NCS and Armstrong World Industries, Inc. AWI in the Zacks Building Products - Miscellaneous industry.

Nonetheless, analysts are optimistic about United Rentals’ near-term growth prospects, as is evident from the recent estimate revision trend. Earnings estimates have risen in the past few weeks, suggesting bullish sentiments on United Rentals. Over the past 60 days, the Zacks Consensus Estimate for earnings for the current quarter has increased 1.5%, and the same for 2018 and 2019 was up 0.8% and 3.6%, respectively. This bullish trend justifies the Zacks Rank #2 (Buy) stock’s retention in investors’ portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What Makes United Rentals a Solid Pick?

Solid Growth Prospects: Solid end-market demand bodes well for United Rentals. The company serves the following three principal end markets for equipment rental in North America, namely industrial and other non-construction, commercial construction and residential construction. The overall outlook of the construction market remained positive so far this year. Factors like an improving economy, Trump’s impetus to boost infrastructure, wage growth, low unemployment levels and positive consumer sentiments raise optimism surrounding the sector’s performance. Construction spending in the United States has ramped up lately, supported by a steady increase in outlays on private as well as public construction projects. As such, demand for United Rentals’ products should increase as well, thereby driving revenues. The company expects that majority of its end markets will continue to experience solid demand for equipment rental services in 2018.

United Rentals has solid growth prospects, as is evident from the Zacks Consensus Estimate for earnings for the current quarter of $4.72 per share, which is expected to increase 41.3% year over year. Again, earnings for 2018 and 2019 are pegged at $16.23 and $19.05 per share, which are expected to grow 53.3% and 17.4%, respectively.

Expansion Via Acquisitions: United Rentals is expanding its geographic borders and product portfolio through acquisitions and joint ventures. United Rentals made five acquisitions during 2018, which are likely to boost its general rentals and specialty segments. The most recent is the BlueLine acquisition carried out in October 2018.

BlueLine, one of the ten largest equipment rental companies in North America, has a strong well-diversified customer base, serving more than 50,000 customers in the construction and industrial sectors, with a focus on mid-sized and local accounts. This acquisition will boost the company’s capacity across the largest metropolitan areas in North America, including both U.S. coasts, the Gulf South and Ontario. The buyout will also increase United Rentals’ fleet by more than 46,000 rental assets across 114 branch locations. Additionally, the deal is expected to generate approximately $45 million of cost synergies in corporate overhead, operations and third-party re-rent areas. Also, it will likely realize approximately $15 million of fleet and other procurement savings based on the combined spending.

Valuation Looks Rational: United Rentals has a Value Style Score of A, putting it in the top 20% of all the stocks we cover from this perspective.

The company currently has a trailing 12-month P/E ratio of 7.36, below the industry’s average of 12.57x. This indicates that the stock is undervalued compared to peers. Also, the company has a forward P/E ratio of 6.71, lower than the industry average of 9.87x. Hence, it is fair to say that a slightly more value-oriented path may be ahead for the stock in the near term.

Also, the company currently has a trailing 12-month EV/EBITDA ratio of 6.11, below the industry average of 18.45x.

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