In a nice start to the new year, United Rentals Inc. (URI, Financial) announced on Jan. 12 it had received the Glassdoor Employee’s Choice Award. That meant it was one of America’s best places to work.
But would investors want to invest in it? Perhaps the answer came in another news release two days earlier. It had just been named to the 2023 Just 100 list, “a preeminent list of companies that are doing right by all their stakeholders – employees, customers, communities and the environment – while also generating strong performance for shareholders.”
But is that "strong performance for shareholders" enough for skeptical investors who want more than promising words?
I will check into that by reviewing United’s fundamentals.
About United Rentals
The company calls itself “the largest equipment rental company in the world” in its 10-K for 2022. It operates mainly in the United States and Canada, with limited operations in Europe, Australia and New Zealand.
Backing up its claim to be the largest renter, its fleet is valued at $19.61 billion, based on original equipment costs. Altogether, it has more than one million equipment units placed across 1,521 rental locations.
Obviously, it is an asset-heavy business and uses debt to finance at least some of that equipment, property and buildings, which it later monetizes through rentals and some sales.
Some of that debt is also needed to help fund its many acquisitions, with two major deals in the past two years. By purchasing General Finance in 2021, it gained entry into Australia and New Zealand with an established platform. Buying Ahern Rentals, the eighth-largest company in the U.S., in 2022, allowed it to increase its capacity in key regions, including both U.S. coasts and the Gulf region.
Based in Stamford, Connecticut, the company has a market cap of $29.75 billion and had 2022 revenue of $11.64 billion.
Competition
According to the annual report, the industry is highly fragmented and competitive. With the addition of Ahern, it estimates it has a 17% market share in North America.
While the company does not name competitors, GuruFocus lists AerCap Holdings NV (AER, Financial), U-Haul Holding Co. (UHAL, Financial) and Avis Budget Group (CAR, Financial) among others. It also provides this competitive performance chart:
So we see significant outperformance, especially in the past few years. The company says in the annual filing that it enjoys nine competitive advantages, which include a large and diverse rental fleet, significant purchasing power, a national account program, operating efficiencies, its information technology systems, strong brand recognition, geographic and customer diversity, strong and motivated branch management and its risk management and safety programs.
From a competitive perspective, I see the company as probably the most powerful player in its piece of the business services industry.
Financial strength
As noted, United is an asset-heavy business, buying expensive equipment first, then generating revenue later by renting. The amount of that debt has brought down its financial strength rating to 4 out of 10. The ranking is based on the interest coverage ratio, the debt-to-revenue ratio and Altman Z-Score.
The interest coverage ratio of 7.26 gives us a glimpse of how well the company can handle its debt. GuruFocus explains, “Ben Graham requires that a company has a minimum interest coverage of 5 with the companies he invested. If the interest coverage is less than 2, the company is burdened by debt.”
Among its peers and competitors, United’s interest coverage ratio does not look out of place (it is the large green circle on the right):
A look at the financials tells us its short- and long-term debt add up to $11.37 billion while its revenue was $11.64 billion. That makes the debt-to-revenue ratio close to 1.
The Altman Z-Score of 2.54 is in the grey zone, which means the company is under some financial pressure. United Rentals carries a significant debt load, but as the interest coverage chart showed, it is reasonable for companies in the equipment rental business.
Profitability
It is a full 10 out of 10 for profitability, when assessed on its operating margin, trend of the operating margin, the consistency of its profitability, its Piotroski F-Score and its predictability rank.
The high ranking is almost a given, considering all the dark green and light green on this table (dark green for industry-leading and lighter green for above-average in the industry).
Growth
The company got another 10 out of 10 ranking for growth, this time based on its three- and five-year revenue growth rate, the predictability of its five-year revenue and its five-year Ebitda growth rate.
To start, revenue over the past three and five years has been quite consistent, as shown in this 10-year chart:
Five-year Ebitda growth shows a similar trend, although it has grown slightly faster: 10.86% per year on average versus 9.83% per year for revenue.
Earnings per share without non-recurring items has a different growth profile, and over the past five years its growth has been higher than both revenue and Ebitda, at an average of 12.34% per year.
Free cash flow has grown even faster, at an average of 18.80% per year.
Dividends and share repurchases
Aside from capital gains, there have been no rewards for shareholders recently. But that changed with United Rentals’ announcement of fourth-quarter and full-year 2022 results.
The company announced it was initiating a quarterly dividend of $1.48. Shareholders of record as of Feb. 7 will receive their payment on Feb. 22. Based on the share price at the close on Jan. 25, that would provide an annualized yield of about 1.5%.
At the same time, it announced it would restart its share buyback program, with plans to repurchase $1 billion worth of common stock this year.
These announcements signal the board of directors’ strong confidence in the company’s future.
Valuation
The GF Value Line indicates United Rentals is modestly overvalued based on its historical ratios, past financial performance and analysts' future earnings projections. It assigns an intrinsic value of $376.54, well below the Jan. 31 share price of $431.27.
The company’s price-earnings ratio comes in at 14.49, which is lower than the business services industry median of 15.97.
The PEG ratio, helped by a five-year average Ebitda growth rate of 15.20%, is 0.95, slightly below the fair value mark of 1.
Turning to the 10-year price chart, we see it is well above its previous highs and its trendline.
One more metric, and this one sees deep undervaluation. The discounted cash flow calculator arrives at a valuation of $1,024.03. That suggests a margin of safety of 57.89%.
As an aside, the default values for growth are 2% in the growth stage and 4% in the terminal stage. That 2% is very low, especially for a company that has averaged earnings per share without NRI growth of 31.20% for the past decade. Using a 25% growth rate would produce a fair value of $1,437.64 and a margin of safety of 70%.
Looking at all five of these measures, there is room for debate. My assessment would be the stock is modestly overvalued.
Gurus
According to 13F filings, 11 gurus held shares in United at the end of the third quarter, led by Glenn Greenberg (Trades, Portfolio) of Brave Warriors Advisors (451,639 shares), Elfun Trusts (Trades, Portfolio) (242,667 shares) and Larry Robbins (Trades, Portfolio) of Glenview Capital Management (180,812 shares).
Institutional investors are heavily invested in the rental company, making up 97.24% of shares outstanding. Insiders held another 6.11%, led by Executive Vice President and Chief Operating Officer Michael Kneeland, who had 107,163 shares as of March 11, 2022. President and CEO Matthew Flannery owned 86,964 shares as of July 28.
Note that the total number of shares exceeds 100%, which usually indicates either short selling or some reporting issue.
Investors should know 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Conclusion
I think United Rentals is a quality stock with a convincing performance in recent years. What is more, adding a dividend and bringing back share repurchases will make it even more attractive for many investors. However, it is unlikely to be available at a bargain price.
