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Growth & Income

Estimates have been rising for McGrath RentCorp (MGRC - Snapshot Report) after the company recently turned a triple play: a positive revenue surprise, a positive earnings surprise, and increased earnings guidance from management.

It is a Zacks #1 Rank (Strong Buy) stock.

McGrath offers solid earnings growth potential and also pays a dividend that yields a stellar 3.6%. Valuation is reasonable too, with shares trading below their historical median.

Company Description

McGrath RentCorp is a business to business rental company. It rents and sells modular offices and classrooms, electronic test equipment, and storage tanks to a variety of end users.

It is headquartered in Livermore, California and has a market cap of $617 million.

Second Quarter Results

McGrath RentCorp reported strong second quarter results on August 4. Revenue jumped 20% year-over-year to $79.5 million, well ahead of the Zacks Consensus Estimate of $74.0 million. This increase was driven by strength in both the electronics and tank rental businesses.

Revenue in the Electronics division, for instance, rose 19%. The Tank Rental division saw revenue growth of 81% due to higher business activity levels and continued expansion of Adler's rental equipment inventory.

Revenue in its Mobile Modular division slid 3% year-over-year, due to an 8% decline within the state of California. The reason for this is that much of the revenue in this segment comes from the education industry, which is dependent upon the level of state funding to public schools. Obviously California's fiscal mess has put a damper on spending.

McGrath saw strong margin expansion in the quarter. Gross profit improved from 45.9% of revenue to 49.5% while the operating margin increased from 20.4% to 26.0%.

Earnings per share came in at 46 cents, crushing the Zacks Consensus Estimate of 35 cents. It was a 48% increase over the same quarter in 2010.

Raised Guidance

Following strong second quarter results, management raised its guidance for the full year. The company now expects to earn between $1.65 and $1.75 per share, up from previous guidance of $1.52 to $1.62.

Analysts revised their estimates higher for both 2011 and 2012, sending the stock to a Zacks #1 Rank (Strong Buy) stock. The 2011 Zacks Consensus Estimate is now $1.75, at the high end of guidance. This equates to 17% EPS growth over 2010.

The 2012 consensus estimate rose to $1.88, which corresponds with 7% EPS growth.

Solid Dividend

McGrath pays a dividend that yields a stellar 3.6%. The company has a history of consistently raising its dividend too. Since 2000, for instance, McGrath has increased it at a compound annual growth rate of 11.7%.

MGRC: McGrath RentCorp

Reasonable Valuation

The valuation picture looks very reasonable for this Zacks #1 Rank (Strong Buy) stock. Shares trade at 14.1x 12-month forward earnings, a discount to its historical median of 15.7x. Its price to sales ratio of 2.0 is in-line with its peers.

The Bottom Line

With strong revenue growth, expanding margins, rising earnings estimates, a solid dividend, and reasonable valuation, McGrath RentCorp offers investors plenty to like.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.

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