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Can United Rentals' Large Rental Fleet Fight Economic Woes?

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The economy is grappling with uncertain market conditions arising from COVID-19. Although several markets are now open in almost full strength, the level of economic disruption is yet to be disclosed.

Defying all the odds arising from COVID-19 and other industry woes, United Rentals Inc. (URI - Free Report) is set to benefit from its extensive and diverse rental fleet, which allows it to serve a large range of customers across the world. The world’s largest equipment-rental company is also gaining from business expansion strategy across the product portfolio and geographic boundaries.

Shares of this Zacks Rank #3 (Hold) company have outperformed its industry in the past three months. The stock has gained 56.1% in the said period compared with the industry’s rally of 39.9%. Estimates for 2020 have trended 2.4% upward in the past seven days, reflecting analysts’ optimism surrounding the company’s earnings growth potential.

Yet, higher fuel costs, increased acquisition-related expenses, and a volatile oil and natural gas market are risks to the company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s dig into the factors.

Substantial Growth Drivers

United Rentals has been generating profits over the past several quarters. Its earnings surpassed analysts’ expectations in each of the last nine quarters. The company’s rental fleet is the largest and most comprehensive in the industry. It keeps on monitoring repairs and maintenance expenses to satisfy customers’ demands and optimize utilization levels.  

United Rentals enjoys strong brand recognition, which enables it to draw customers and build customer loyalty. The company keeps expanding geographic borders and product portfolio through acquisitions and joint ventures. Meanwhile, the BlueLine acquisition in late 2018 continues to remain significant as it boosts its capacity across the largest metropolitan areas in North America, including both the U.S. coasts, the Gulf South and Ontario.

Meanwhile, by increasing the mix of Specialty (which includes higher-margin trench, power and fluid solutions) in the portfolio, the company will be able to hold onto much of the margin improvement. Over the past five years, Specialty’s contribution to its pro-forma revenues has increased from less than 7% to nearly 27%.

Apart from these contributing factors, United Rentals has a solid VGM Score of A. Also, the company is a great pick in terms of value investment, supported by a Value Score of A.

The company’s trailing 12-month return on equity (“ROE”) is another indication of its growth potential. ROE in the trailing 12 months is 41.2% compared with the industry’s 11.8%, reflecting the company’s efficient usage of its shareholders’ funds.

Threats to the Company

The prevailing economic uncertainty that is hurting construction and industrial activities is currently a major threat to United Rentals — which shares space with Installed Building Products, Inc. (IBP - Free Report) , TopBuild Corp. (BLD - Free Report) and Armstrong World Industries, Inc. (AWI - Free Report) in the same industry.

During the first quarter 2020, the company witnessed lower rental revenues due to reduced rental volume. The downside was mainly due to shelter-in-place orders and other end-market restrictions. Notably, the company suspended its previously provided 2020 guidance in response to the virus impact.

Additionally, acquisitions, higher costs and expenses related to repairs and maintenance of the fleet, including higher delivery costs for transfer of equipment from one facility to another are denting its margins.

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