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United Rentals (URI) Upgraded to Buy: Should You Add Now?

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We upgraded United Rentals, Inc. (URI - Free Report) by a notch to a Zacks Rank #2 (Buy) on Sep 20.

Notably, shares of the company have rallied 27.8% in the last three months, compared with the 2.8% gain of the industry it belongs to. Additionally, United Rentals outperformed the industry in each of the 4-week, 12-week and 52-week time frames.

 



The company surpassed estimates in all of the past four quarters, with an average beat of 7%. Estimates have moved 0.7% north for the current quarter and year over the last 60 days, hinting at the stock’s solid prospects.

Key Growth Drivers

As the largest equipment rental company in the world, United Rentals enjoys strong brand recognition, which enables it to draw customers and build customer loyalty. The company’s main strategy is to improve profitability of its core equipment rental business through revenue growth, margin expansion and operational efficiencies.

In particular, the company’s strategy calls for the implementation of Project XL, which is a set of eight specific work streams focused on driving profitable growth through revenue opportunities and generating incremental profitability through cost savings. The company expects Project XL to contribute at least a $200 million run-rate benefit to EBITDA by 2018-end.

United Rentals’ extensive and diverse fleet distinguishes it from the other players in the same space. The company’s rental fleet is the largest and most comprehensive in the industry.  

Also, expanding geographic borders and product portfolio through acquisitions has been a key growth strategy of United Rentals. In April 2017, United Rentals completed the acquisition of NES Rentals — one of the ten large general equipment rental companies in the United States. The acquisition expands United Rentals’ geographic footprint in key markets like East Coast, Gulf States and Midwest. It is also expected to strengthen relationships with local and strategic accounts in the construction and industrial sectors, thus enhancing cross-selling capabilities.

The NES Rentals acquisition will benefit United Rentals’ technology and infrastructure. NES contributed $105 million to revenues and $46 million in adjusted EBITDA in the second quarter of 2017. United Rentals has already realized $2.5 million in synergies and is on track to garner $40 million in cost savings from the NES transaction.

The company also makes a good value pick with a Value Score of A, putting it in the top 20% of all stocks we cover from this perspective. This implies that the stock is trading lower than its fair value or intrinsic value and thus offers a significant upside potential.

United Rentals’ focus on the implementation of Project XL, extensive and diverse fleet and strategic acquisitions ensure solid prospects.  In 2017, the company’s earnings are estimated to grow 13.5% compared to the projected rate of 6.1%. Sales growth is projected at 10.8%, higher than the industry’s estimated rate of 3%.

We believe United Rentals is a potential outperformer with a Zacks Rank #2 and a VGM Score of A, making it a secure bet for the near term.

Other Key Picks

Investors can also consider other top-ranked stocks in the Construction sector like Beazer Homes USA, Inc. (BZH - Free Report) , NVR, Inc. (NVR - Free Report) , and M/I Homes, Inc. (MHO - Free Report) .

Beazer, a Zacks Rank #1 (Strong Buy) stock, surpassed earnings in two of the past four quarters, the average beat being 103.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVR and M/I Homes carry a Zacks Rank #2 (Buy). NVR is expected to witness 33.9% growth in 2017 earnings, while M/I Homes is likely to see a 37.1% rise.

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