There's an old saying that the people who profited most from
the California gold rush of the 1850s weren't the speculators,
but those who sold picks and shovels.
Well, there's a modern-day gold rush underway -- the domestic
energy boom you've probably heard about. This is where new
drilling methods, like hydraulic fracturing, are uncovering huge,
previously inaccessible oil and gas reserves trapped in shale and
other hard rock formations.
Because of the success of such techniques, analysts are making
bold predictions about domestic energy output. For instance, some
say shale oil production could rise as much as 88% by 2020 to 16
million barrels per day. Of course, there are analysts who'd
dispute this, but most agree the United States could soon become
the world's number one energy producer.
But wait, it looks like there's a big construction boom going
on, as well.
As you may have heard, housing starts rebounded nicely in
July, climbing 15.7% to a seasonally adjusted 1.09 million units.
The increase broke a two-month streak of declines, according to
the Commerce Department.
During the past year alone, revenues rose 17% for the overall
residential construction industry, according to North
Carolina-based Sageworks, which provides financial analysis of
individual companies and industries.
Sageworks says other construction-related areas have also seen
business spike, like construction material wholesales,
nonresidential building construction and architectural,
engineering and related services. In these industries, growth
rates ranged from 12% to 17% during the past year.
So with the energy boom marching along and construction
rebounding strongly, it looks like there are a couple gold
rush-type opportunities right now. And the nice thing is,
investors can benefit from both with a single stock.
I see this company,
United Rentals (NYSE:
, as a potentially lucrative 'pick and shovel' supplier for these
two 21st-century gold rushes because it doesn't drill for oil or
put up office buildings. Rather, it has rapidly become the
world's largest equipment rental operation, with 832 North
American locations, more than 3,000 classes of rental equipment
and sales of $5.2 billion.
At this point, United is mainly construction-focused,
generating about 44% of revenue with general construction
equipment like backhoes, excavators, forklifts and hand tools.
Another 36% of sales are from aerial work platforms used in
In April, however, the firm began setting itself up to profit
nicely from the energy boom when it closed a buyout of National
Pump for $780 million. National is one of North America's top
commercial pump rental outfits with $211 million of annual
revenue - nearly half of its revenue is derived from energy and
petrochemical firms involved in oil and gas exploration and
Before the buyout, National Pump was rapidly expanding -- at a
50% rate for the prior three years. Adjusted EBITDA (earnings
before interest, taxes, depreciation and amortization) around the
time of the deal was $103 million, which is good for an adjusted
EBITDA margin of 49%.
United expects its new high-margin pump business to quickly
boost earnings per share (
) and cash flow. Although it plans to double the business within
five years, this could happen much faster considering how rapidly
National Pump was growing when United acquired it.
Other key factors in United's favor: market share and heavy
reliance on rentals.
United boosted its market share to 14% after acquiring its
main rival, RCS Holdings, for $1.9 billion in 2012. Although 14%
may not sound like a lot, it's enough for United to dominate the
highly fragmented equipment rental industry.
Time is money, and in its present state, the firm can reliably
provide large customers with equipment with little or no lag
time. Unlike smaller rivals, United does not have to wait for a
client to return its property before it can be rented out again.
This should help United grab even more market share, considering
construction companies now rent half of all the equipment they
United made a number of acquisitions recently, besides
National Pump and RCS, which is stimulating exceptional growth.
Since 2011, EPS nearly tripled to $4.01 from $1.38, and United's
stock soared 300%.
However, I'd expect growth to moderate quite a bit now that
United is atop the equipment rental industry and can focus on
sustainable expansion. Consensus estimates call for EPS to climb
23% annually, reaching $11.29 in 2019 -- fast growth, to be sure,
but not like the past few years.
Risks to Consider:
Because of heavy spending on acquisitions, United posted
three straight years of negative free cash flow from 2011 through
2013, when the deficit averaged $326 million a year. Chronically
negative free cash flow can hinder future growth.
Action to Take -->
Although shares of United Rental have run up massively, this
'pick and shovel' company still offers substantial profit
potential and is set for positive and growing free cash flow.
Based on projected EPS growth, the stock could rise more than 70%
to about $200 from $117 currently during the next five years.
With a price-to-earnings (P/E) ratio of 29, shares aren't as
pricey as they look. With projected EPS of $8.32 for 2015, the
forward P/E is only 14, making now an opportune time to buy.
United Rental is not the only way to invest in America's oil
boom. StreetAuthority Resource Expert Dave Forest just returned
from a trip to a region he's calling "the world's next
$1 Trillion Boomtown
." This find is bigger than the Bakken and Eagle Ford Shale plays
combined. You can still get in early. To learn more about our top
three investment recommendations,
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