United Rentals

United Rentals, Inc. ( URI - Snapshot Report ) seems to be well positioned to benefit from improving U.S. construction activities. Plus, an expansion in the rental market will definitely help the growth prospects of the stock.

This Zacks #1 Rank (Strong Buy) has a compelling valuation, including a price-to-earnings (P/E) multiple of 11.08 that makes it a true value pick. In addition, this equipment rental company has surpassed the Zacks Consensus Estimates in five straight quarters, and is witnessing an upward trend in earnings estimates since its third-quarter report.

Strong Q3 Performance

On October 15, United Rentals reported third-quarter earnings of $1.35 per share, which beat the Zacks Consensus Estimate by 21.6% and trounced last year’s earnings by 46.7%. The company has now topped the Zacks Consensus Estimate for five consecutive quarters with an average surprise of 141.1%.

Total revenue increased 8.7% year over year to $1,219 million, but fell short of the Zacks Consensus Estimate at $1,280 million. Rental revenue grew 8.9% to $1,051 million on the back of a 7.9% jump in the volume of equipments rented and a 7.5% increase in rental rates. EBITDA during the quarter surged 27.8% to $570 million, with EBITDA margin expanding 700 basis points to 46.8%.

Due to the acquisition of RSC Holdings, the company realized cost synergies of $45 million during the quarter and raised its long-term cost synergy target to between $230 and $250 million, up from at least $230 million forecasted previously. Management expects to recoup $100 million of the target in 2012, up from $80 million estimated earlier.

Outlook

Management reiterated its 2012 outlook for total revenue between $4.6 billion and $4.7 billion and EBITDA of $1.95 billion to $2 billion. However, the company increased its rental rate projection by 50 basis points to approximately 7%.

Earnings Estimates on the Rise

The Zacks Consensus Estimate for 2012 rose 9.3% to $3.53 per share over the past 30 days, as all 5 estimates were revised higher. The current estimate implies year-over-year growth of 88.7%. For 2013, the Zacks Consensus Estimate is up 1.3% to $4.73 per share, suggesting year-over-year growth of 34.2%.

Impressive Valuation

In addition to an attractive P/E multiple, United Rentals has a price-to-book (P/B) ratio of 2.37. (A P/B ratio under 3.0 and P/E below 15.0 generally suggests a value stock.) Its price-to-sales (P/S) ratio is just 1.00, lower than the industry average of 1.76. Volume is fairly strong, averaging roughly 3,045K daily. The return on equity (ROE) also looks attractive. It has a trailing 12-month ROE of 34.7% compared with the peer group average of 5.9%. It also has a PEG ratio of 0.90, which is less than one and indicates that the stock is reasonably valued given the long-term earnings growth projection of 12%.

Chart Overview

The 12-month EPS chart below indicates that the stock price is now gradually moving upward along with earnings estimates. The stock price has generated a solid year-to-date return of 34.9%, significantly higher than the S&P 500’s return of 10.6%.

United Rentals is the leading equipment rental company operating through 848 rental locations (as of September 30, 2012) in the United States and Canada. The company offers approximately 3,400 types of equipment on rent to a diverse customer base comprising construction and industrial companies, utilities, manufacturers, government entities, municipalities and homeowners. United Rentals, which primarily competes with Hertz Global Holdings, Inc. (HTZ), has a market cap of $3.62 billion.

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