Value Investing Congress: Don’t Buy This Recovery


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Mick McGuire leads Marcato Capital Management, where is focuses on passive and activist investments in undervalued stocks. He's a proven value investor who previously worked with Bill Ackman at Pershing Square.

At the Value Investing Congress today, he presented one of his favorite investment ideas. His firm owns nearly 5% of the stock in this company that he views as a play on the recovery of the construction market.

Recommends: United Rentals ( URI ) - $56 per share

  • $6 billion market cap
  • Largest equipment rental company
  • 400,000 units of equipment for rent (i.e. forklifts, earthmoving machines, aerial work platforms)
  • 2012 acquired #2 company in sector
  • Operates in U.S. and Canada
  • Pure play on the North American commercial construction recovery
  • Residential construction is just 4% of their revenues (versus 47% commercial, and 39% industrial)
  • Cyclical trends are positive, secular trends provide additional tailwind
  • Customers are choosing to rent, rather than buy equipment
  • U.S. construction (total) is 26% below peak of 2006
  • Construction spending is trending up 7.5% year-over-year
  • Strong housing starts are up; a leading indicator for non-residential construction
  • Housing starts remain 40% below the normal long-term average of 1.5 million units per year
  • Expect rising demand for rental of equipment
  • Company: never seen more demand from customer base
  • Think of this as "renting the recovery"
  • Rental penetration rate has increased from 5% in 1993 to 50% today
  • Rental of equipment is far more economical and affordable
  • 2012 - 2015: Compound annual growth of 9.7%
  • Company has 15% share of the market
  • National footprint allows company to target larger companies
  • 2005 to 2011, reduced store redundancies by combining locations
  • EBITDA margins of 46.1%
  • Possibility for share repurchases
  • Average of 5.2x EBITDA over history
  • Trades at 5.6x EBITDA and 12x current year earnings
  • Stock is fairly valued based on current business
  • But valuation fails to price in where we are in the economic cycle
  • Estimated 5.5x 2015 EBITDA estimate
  • Share price target: $96 per share - 75% premium to current price

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

This article appears in: Investing , Stocks

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