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United Rentals (URI) Up 19.1% 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 19.1% 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 its most recent earnings report in order to get a better handle on the important catalysts.

United Rentals (URI - Free Report) Beats on Q3 Earnings, Narrows View

United Rentals, Inc. (URI - Free Report) reported third-quarter 2019 results, wherein earnings and revenues beat the respective Zacks Consensus Estimate. However, the company narrowed its full-year guidance. United Rentals remains concerned about the lingering economic uncertainty that could impact construction and industrial activity.

Nonetheless, the company has been witnessing improved demand in construction end-markets served, partly offset by slower industrial growth. It remains upbeat about 2020 and expects higher free cash flow generation, considering all these market dynamics.

Inside the Headlines

Adjusted earnings of $5.96 per share beat the Zacks Consensus Estimate of $5.53 by 7.8% and increased 25.7% from the prior-year figure of $4.74.

Revenues

Total revenues of $2.49 billion surpassed the consensus mark of $2.45 billion by 1.6%. Moreover, revenues rose 17.6% year over year.

Rental revenues (including revenues from owned equipment rental, re-rent and ancillary) were also up 15.4% (increasing 4.2% on a pro-forma basis) from the year-ago quarter to a record $2.15 billion, buoyed by solid impact of BakerCorp and BlueLine acquisitions. The pro-forma improvement reflects growth in construction end markets served by the company.

Fleet productivity was down 1.3% year over year in the quarter, mainly due to the impact of the above-mentioned buyouts. On a pro-forma basis, fleet productivity was up 1.7% from the prior-year quarter, attributable to improvement in rental rates and fleet mix, partially offset by a decline in time utilization owing to integration of the recent acquisitions. Notably, Fleet productivity aggregates the impact of changes in rates, utilization and mix on owned equipment rental revenues.

Segment Discussion

General Rentals: Segment equipment rentals’ revenues increased 13.7% year over year to $1.64 billion. However, rental gross margin contracted 270 basis points (bps) year over year to 40.9% due to higher operating costs and the impact of acquisitions.

Trench, Power and Pump/Specialty: Segmental rentals revenues increased 21.1% year over year to $505 million. Organically, sales grew 10.3% from the prior-year quarter. Rentals gross margin declined 360 bps on a year-over-year basis to 48.7% owing to acquisitions, and higher operating costs due to repair and maintenance works.

Overall Margins

The company’s total equipment rentals gross margin dropped 280 bps year over year to 42.7%.

Nevertheless, adjusted EBITDA increased 14% from the prior-year quarter to $1.21 billion. However, adjusted EBITDA margin contracted 150 bps to 48.5% in the quarter, owing to the impact of the completed acquisitions. On a pro-forma basis, EBITDA margin declined 40 bps, reflecting higher operating costs.

Balance Sheet

United Rentals’ cash and cash equivalents totaled $60 million as of Sep 30 compared with $43 million at 2018-end.

In the quarter, the company generated $992 million as net cash from operating activities, reflecting an increase of 109.3% from the year-ago period. Free cash flow was $302 million in the quarter.

In the first nine months of 2019, net cash from operating activities came in at $2.58 billion (up 21.6%) and free cash flow was $1.1 billion (up 101.9%).

Share Repurchase Program

In the first three quarters of 2019, United Rentals repurchased $630 million worth of stocks and reduced its share count by 3.1% year over year. As of Sep 30, 2019, the company repurchased $1.05 billion of stocks under the $1.25-billion share repurchase program, which is expected to be completed by 2019-end.

2019 Guidance Updated

Total revenues are expected in the range of $9.25-$9.35 billion (versus $9.15-$9.45 billion expected earlier), indicating an increase from $8.05 billion in 2018.

Adjusted EBITDA is projected between $4.35 billion and $4.4 billion (versus $4.35-$4.5 billion projected earlier), suggesting growth from $3.86 billion in 2018.

Net rental capital expenditures after gross purchases are projected in the range of $1.25-$1.35 billion, implying a decline from $1.442 billion in 2018. The company had earlier expected the same within $1.3-$1.4 billion.

Net cash provided by operating activities is expected in the range of $2.9-$3.05 billion ($2.85-$3.1 billion was projected earlier), pointing to an improvement from 2.85 billion reported in 2018.

Free cash flow (excluding the impact of merger and restructuring-related payments) is now expected in the range of $1.45-$1.55 billion compared with $1.4-$1.55 billion of prior expectation. The current guidance for the metric suggests an increase from $1.33 billion reported in 2018.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

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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