United Rentals' Equipment Powers Industrial Recovery

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If you run a factory, one of the last things you want to see is production slow to a crawl while you upgrade or maintain your equipment.

To prevent this from happening, many production managers look for ways to keep manufacturing processes in place even as equipment is shut down. One option is to rent equipment during the shutdown to ensure that production continues.

This is whereUnited Rentals ( URI ) steps in. The company offers around 3,300 classes of equipment for rent to construction companies, manufacturers, oil and gas companies, utilities, governments and other customers.

It rents everything from backhoes, forklifts and earth-moving equipment to general tools, pressure washers, water pumps and safety gear.

The company has a nearly $8 billion fleet with more than 250,000 pieces of equipment available, says United Rentals Chief Executive Michael Kneeland. It operates in 49 of the 50 states as well as all 10 Canadian provinces.

"We have the broadest footprint of anyone in North America," Kneeland told IBD.

Productive Pinch-Hitter

Customers use United Rentals' gear for a variety of reasons. In some cases, manufacturers need to rent machines to keep production online while their regular gear is being serviced.

In other cases, companies rent equipment to save money. This is particularly true of construction firms that don't want to invest huge sums in new equipment.

"Ours is a minor cost when you take a look at the overall cost of a construction site," Kneeland said. "It's estimated that rental costs are only 2% to 3% of the total costs for certain jobs. You have the flexibility of owning the equipment, but you don't have the maintenance costs or carrying costs."

For some jobs, United Rentals must be ready to respond to orders immediately. That's why it has blanketed North America with more than 820 rental locations.

"We have a 30-minute window," Kneeland said. "If you ordered it at 1 p.m. and it gets there at 1:31, we failed. Our customers look for reliability, accessibility, and product depth and knowledge."

Those orders are coming in a lot more frequently these days amid a rebound in construction and other markets. United Rentals' financial results reflect that demand. The company has notched double-digit sales growth in nine of the last 10 quarters.

For the third quarter, for which it reported results Wednesday, United Rentals posted earnings of $1.63 a share, up 21% from a year ago. Though not as strong a gain as in past quarters, the result was three pennies ahead of analyst views. Revenue rose 8% to $1.31 billion, just below views for $1.32 billion.

During the quarter, Citigroup analyst Timothy Thein had noted that the company's key end markets were "still in the early stages of a recovery." He also cited United Rentals' exposure to North America's "growing domestic manufacturing sector" and predicted "rental penetration will continue to increase."

These trends have helped United Rentals rebound from a downturn in business that paralleled the financial crisis and recession of a few years ago. The company reported three straight years of lower sales from 2008 through 2010. It lost money in 2009.

"We went through the downturn ourselves, and it gave us an opportunity to right-size and optimize our footprint," Kneeland said.

Real Estate Earth Mover

The rebound in the residential real estate market has given a boost to United Rentals' business, he says. He expects a similar lift when nonresidential construction picks up steam.

"The nonresidential market usually trails residential by a year to 18 months," Kneeland said. "It takes that long to put the dollars to work. We think there's a very nice outlook for the rental equipment industry."

Kneeland mentioned on the company's third-quarter conference call with analysts that rental revenue increased by more than 8%, and the company reaffirmed its outlook for a full-year rise in rental rates of at least 4%.

"Nonresidential construction spending is recovering, although the pace is very modest," Kneeland said on the call.

"The bulk of the upswing is expected to come in 2014 and 2015 but demand is definitely improving and we're getting a benefit from that."

The outlook for United Rentals includes the likelihood of buyouts to help expand its footprint. The company has made a half-dozen acquisitions over the last couple of years, including its $2.53 billion purchase of rival RSC Holdings, which closed in April 2012.

Although deals of that size are pretty rare, United Rentals does keep a constant eye out for buyout opportunities, Kneeland says.

"We've talked about leveraging acquisitions and expanding our specialty business," he said. "We are always going to be acquisitive. But the deals would have to be strategic, they would have to add value for shareholders, and we would have to look at the cultural aspects to make sure we can integrate them properly."

On Thursday's call with analysts, Kneeland noted that United Rentals' board has authorized up to $500 million in share repurchases that are expected to take place over the next 18 months.

There aren't a lot of big players in United Rentals' industry. Publicly traded companies that rent heavy equipment includeH&E Equipment Services ( HEES ) andHertz Global Holdings ( HTZ ), though the latter firm gets the vast majority of its business from car rentals.

Analysts polled by Thomson Reuters expect United Rentals to return full-year EPS of $4.86, which would be up 29%, and revenue of $4.95 billion, up 20%.

On its conference call, the company reaffirmed its 2013 target range of $4.9 billion to $5.1 billion in revenue -- the midpoint just above the consensus expectation of analysts polled by Thomson Reuters.

By early Friday afternoon, United Rentals' stock had touched a record price of 65.36, and was heading for a nearly 4% daily gain and a 41% lift for the year to date.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: HEES , HTZ , URI

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