In an economy that is seeing substantial upticks in consumer and commercial optimism, and in increased manufacturing activity, companies like United Rentals, Inc. (NYSE:URI) are probably feeling confident in their prospects.
If you happen to be a URI stock owner, you’re probably getting pretty excited as well. URI just reported terrific earnings, beating estimates by 44 cents per share. Let’s get into exactly what URI offers, and why its earnings were so great. Then we’ll see if URI stock is still a reasonable enough price to jump in.
URI stock is driven by revenues from equipment rentals in two divisions. The General Rentals handles general construction and industrial equipment that serves those types of companies, as well as manufacturers, utilities, municipalities and homeowners. The Trench, Power and Pump segment is involved in the rental of specialty construction products, including trench safety equipment, power and HVAC equipment, and pumps primarily used by energy and petrochemical customers. It also sells both new and used equipment and has just under 1,000 locations in North America.
Gotta love that footprint!
Rental revenue grew to $1.46 billion up from about 25% from last year’s $1.17 billion. Total revenue rose almost 30% from $1.36 billion to $1.73 billion. Net income exploded from a dollar 27 per diluted share to a $1.78 per diluted share.
The rental revenue number is just terrific, as it reflected a 26% increase in the volume of equipment on rent, yet only a 1.9% increase in rentals rates. URI thus has been seeing substantial increase demand yet is keeping its prices just about where they were.
If we take a look at the trench, power and pump segment revenues, we see it increased 36.5% year-over-year, and that is mostly on a same-store basis. That is just astonishingly good. The CEO of URI stated that “virtually all indicators point to market growth, which supports our reaffirming our outlook for the year.”
That outlook includes total revenue between $7.3 billion and $7.6 billion, between $2.6 billion and $2.8 billion of operating cash flow, and between $1.3 billion and $1.4 billion of free cash flow.
Indeed, for the first quarter alone free cash flow was $516 million. Meanwhile URI stock continues to benefit from improving margins for its return on invested capital. That metric rose 100 basis points to 9.4%, up from 8.4% last year.
URI stock generally does not keep a lot of cash on hand. Its cash balance presently sits at $278 million. Although its debt is sitting at $8.4 billion, debt service only runs about 5%. The board has authorized a stock repurchase program of over $1 billion. I would prefer to see that money instead go to pay down debt.
United Rentals stock is trading at just under 20 times earnings. With roughly 10% EPS growth pegged for this year, but annualized growth pegged at almost 16%, there is quite a gap in terms of what might be considered a reasonable P/E ratio.
Bottom Line on URI
I don’t give URI stock any particular premium because it doesn’t have the kind of robust cash flow, cash on hand, or global brand name that makes it deserving of any such premium. Consequently for a stock trading at 20 times next year’s earnings, with long-term growth packet only 16%, URI stock feels pricey to me at this time.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.