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Solid End-Market Demand Aids United Rentals Amid High Costs

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United Rentals Inc. URI has been riding high on strong end-market demand, accretive acquisitions and prudent investments in fleet. In addition, positive construction market outlook, and robust technology and digital capabilities are expected to drive growth in the upcoming quarters.

Notably, shares of the largest equipment rental company have outperformed its industry in the past three months. The stock has gained 45.4% in the said period, approximately thrice the industry’s rally of 15.6%. Also, estimates for 2020 have trended upward in the past 30 days, which reflects analysts’ optimism surrounding the company’s earnings growth potential.

However, higher freight and fuel costs, increased acquisition-related expenses, and volatile oil and natural gas market are raising concerns.

Let’s delve deeper into the factors supporting the company’s Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Substantial Growth Drivers

Strong End-Market Demand: Overall construction market scenario remained positive through the first nine months of 2019. United Rentals also remains upbeat about three principal end markets for equipment rental in North America, namely industrial and other non-construction, commercial construction, and residential construction.

The company has been registering volume and rental rate growth over the last six quarters. Markedly, demand for United Rentals’ services and products is sensitive to the level of exploration, development and production activity of oil and natural gas companies. Nevertheless, United Rentals is well poised to benefit from any improvement in energy sector activity in the months ahead, as substantial part of its revenues is generated from the energy sector.

Inorganic Drivers: Being 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 keeps on expanding geographic borders and product portfolio through acquisitions, and joint ventures.

In 2018, the company had acquired WesternOne Rentals & Sales LP, BlueLine, BakerCorp and assets of Industrial Rental Services. Notably, the BlueLine acquisition remains significant as it is boosting the firm’s capacity across the largest metropolitan areas in North America, including the U.S. coasts, and the Gulf South and Ontario.

The company’s strategy is to improve profitability by providing superior standard of service to customers, optimizing customer and fleet mix, and acquisitions to expand the core equipment rental business, along with continued expansion of trench, power and pump footprint and tool offerings.

Solid VGM Score and ROE: United Rentals has a solid VGM Score of A. Also, the company is a great pick in terms of value and growth investment, supported by a Value and Growth Score of A.

Meanwhile, the company’s trailing 12-month return on equity (ROE) is indicative of growth potential. ROE in the trailing 12 months is 42.9% compared with the industry’s 12.4%, reflecting the company’s efficient usage of its shareholders’ funds. The company believes that positive construction market outlook, and its extensive and diverse fleet will boost results in the upcoming quarters.

Hurdles to Cross

Margins Under Pressure: Although consistent acquisitions are expected to generate long-term growth for United Rentals, the same has exerted pressure on margins. Adjusted EBITDA margin in the third quarter of 2019 declined 150 basis points (bps) year over year. In the second quarter, adjusted EBITDA margin contracted 110 bps from a year ago. The downside was primarily caused by the impact of BlueLine and Baker buyouts.

Higher Costs: In the first nine months of 2019, total cost of equipment rentals (excluding depreciation) rose 23.4% year over year.

Meanwhile, the equipment rental industry is highly fragmented and competitive. Competitive pressure could affect its results by decreasing rental volumes, impacting prices charged by the company or increasing costs to retain employees.

Volatile Market: Demand for United Rentals’ services and products are sensitive to the level of exploration, development and production activity of oil and natural gas companies, which are directly affected by volatility of prices. Any prolonged reduction in oil and natural gas prices will weigh down United Rentals’ business.

Zacks Rank

United Rentals — which share space with Installed Building Products, Inc. IBP, TopBuild Corp. BLD and Armstrong World Industries, Inc. (AWI - Free Report) in the Zacks Construction sector — currently carries a Zacks Rank #3 (Hold).

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