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United Rentals (URI) Up 9.5% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for United Rentals (URI - Free Report) . Shares have added about 9.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is United Rentals due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

United Rentals Q4 Earnings & Revenue Beat Estimates

United Rentals posted fourth-quarter 2018 earnings, wherein both the top and bottom lines surpassed the Zacks Consensus Estimate and also improved on a year-over-year basis. The upside can be attributed to strong gains in volume, margins and rates. Solid integration of major acquisitions also aided the quarterly results. It further gained traction from investments in fleet and technology.

Adjusted earnings of $4.85 per share beat the consensus mark of $4.77 and also surged from the prior-year figure of $3.34.

Revenues

Total revenues of $2.31 billion surpassed the consensus mark of $2.21 billion. Moreover, revenues rose 20% year over year.

Rental revenues were also up 20.8% from the year-ago quarter to $1.99 billion. Volume of equipment on rent increased 16.8% and rental rates rose 2.2% year over year.

Segment Discussion

General Rentals: Segment equipment rentals’ revenues increased 14.8% year over year to $1.57 billion. Segment equipment rentals’ gross profit rose 15.8% from a year ago to $695 million. Also, gross margin expanded 40 basis points (bps) year over year.

Trench, Power and Pump: Segmental equipment rentals revenues increased 50.7% year over year to $416 million. Equipment rentals gross profit rose 43.5% to $188 million, while gross margin declined 230 bps on a year-over-year basis. The downside was mainly due to the impact of the BakerCorp acquisition. Also, an increase in lower-margin fuel and re-rent revenues within the Power and HVAC region added to the woes.

Overall Margins

The company’s total equipment rentals gross margin remained flat year over year at 44.4% as higher margins from the General Rentals segment were offset by the weak performance of the Trench, Power and Fluid Solutions segment.

Adjusted EBITDA increased 18% from the prior-year quarter to a record of $1.12 billion. However, adjusted EBITDA margin contracted 90 bps to 48.4% in the quarter, owing to the impact of the completed acquisitions in 2018.

Time Utilization & Fleet Size

Time utilization was down 120 bps year over year to 68.8% due to the impact of BakerCorp and BlueLine acquisitions. On a pro-forma basis, the metric also decreased 60 bps year over year to 69%.

The size of the rental fleet was $14.18 billion of original equipment cost ("OEC") as of Dec 31, 2018, compared with $11.51 billion on Dec 31, 2017. The age of the rental fleet was 47.9 months on an OEC-weighted basis as of Dec 31, 2018, versus 47 months on Dec 31, 2017.

2018 Highlights

Adjusted earnings were $16.26 per share versus $10.59 a year ago. Total revenues came in at $8.05 billion, reflecting an increase of 21.2% from the 2017 level.

Rental revenues grew 21.4% from the year-ago quarter, with 18.8% gain in the volume of equipment on rent and 2.2% increase in rental rates.

Meanwhile, full-year gross margin expanded 10 bps to 41.8% and pre-tax margin increased 250 bps.

Balance Sheet

United Rentals’ cash and cash equivalents totaled $43 million as of Dec 31 compared with $352 million in the corresponding period of 2017.

In 2018, the company generated $2.85 billion as net cash from operating activities compared with $2.21 billion in the prior-year period.

Free cash flow was $735 million in the fourth quarter (up 126.2% year over year) and $1.27 billion in full-year 2018 (up 40.1% from the 2017 level).

Share Repurchase Program

In July, United Rentals initiated its $1.25-billion program to repurchase shares of its common stock. As of Dec 31, 2018, the company repurchased $420 million of common stock under the program that will likely end this year.

2019 Guidance

Total revenues are expected in the range of $9.15-$9.55 billion, reflecting an increase from $8.05 billion in 2018.

Adjusted EBITDA is projected between $4.35 billion and $4.55 billion compared with $3.86 billion in 2018.

Net rental capital expenditures after gross purchases are projected in the range of $1.4-$1.55 billion compared with $1.442 billion in 2018.

Net cash provided by operating activities is maintained in the range of $2.85-$3.2 billion versus 2.85 billion reported in 2018.

Free cash flow is expected in the range of $1.3-$1.5 billion compared with $1.33 billion in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.25% due to these changes.

VGM Scores

At this time, United Rentals has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, United Rentals has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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