We expect United Rentals, Inc. (URI - Free Report) to beat expectations when it reports second-quarter 2017 results after the closing bell on Jul 19. Last quarter, the company delivered a positive earnings surprise of 3.16%. The company also surpassed expectations in each of the last four quarters, with the average beat being 9.13%. Let’s see how things are shaping up prior to this announcement.
Why a Likely Positive Surprise?
Our proven model shows that United Rentals is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: United Rentals has an Earnings ESP of +1.31%. That is because the Most Accurate estimate is $2.32, while the Zacks Consensus Estimate is pegged at $2.29. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: United Rentals currently carries a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, stocks with a Zacks Rank #4 or 5 (Sell rated) should never be considered going into an earnings announcement.
The combination of United Rentals’ favorable Zacks Rank and positive ESP makes us reasonably confident of an earnings beat.
What is Driving the Better-Than-Expected Earnings?
A number of favorable U.S. indicators of 2017 is adding to the positives. The company has been experiencing higher demand in its core construction and industrial sectors. Commercial construction has also remained strong. Upstream oil and gas is also gaining traction with improving macro conditions. The company is likely to experience similar trends in the to-be-reported quarter.
Again, an opportunistic approach to acquisitions is an important part of United Rental’s growth strategy. In Apr 2017, United Rentals completed the acquisition of NES Rentals Holdings II, Inc. NES is one of the 10 large general equipment rental companies in the U.S., providing specialized aerial equipment to approximately 18,000 customers across the industrial and non-residential construction sectors. The latest addition will give a boost to its top line in the second quarter.
However, United Rentals has been experiencing declining rental rates in the recent quarters, thereby creating pressure on margins. Notably, rental rates declined 1.4% in the first quarter of 2017 as well. Although this trend is not likely to reverse anytime soon, management expressed confidence during first-quarter earnings call that rental rates can improve in the second half of 2017 given the continued improvement in the utilization rate.
This improvement is evident from the first-quarter time-utilization rate that came in at 66%, a record high for the January-March period. It improved 190 basis points year over year.
For the second quarter, the Zacks Consensus Estimate for earnings stands at $2.29, reflecting a 11.2% year-over-year increase. The estimate for revenues is pegged at $1.54 billion, implying 8.7% growth.
Stocks to Consider
Here are a few companies in the construction sector that, according to our model, have the right combination of elements to post an earnings beat this quarter:
Owens Corning (OC - Free Report) has an Earnings ESP of +10.78% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company is slated to release its quarterly results on Jul 26.
Lennox International Inc. (LII - Free Report) has an Earnings ESP of +0.73% and a Zacks Rank #2. The company is scheduled to release its quarterly results on Jul 24.
CalAtlantic Group, Inc. (CAA - Free Report) has an Earnings ESP of +7.69% and a Zacks Rank #3. The company is slated to release its quarterly results on Jul 27.
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