- Ranking the top twenty Russell 1000 stocks according to a winning ranking system.
- Explanation and back-testing of the “Balanced4” ranking system.
- Description and a buy recommendation for the fifth ranked stock of the system; United Rentals.
A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them the "Balanced4" in this article.
The "Balanced4" ranking system is quite complex, and it is taking into account many factors like; EPS consistency, technical analysis, valuation, profitability ratios and dividend information, as shown in the Portfolio123's chart below.
In order to find out how such a ranking formula would have performed during the last 15 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 7,014 stocks in the Portfolio123's database.
The back-test results are shown in the chart below. For the back-test, I divided the 7,014 companies into fifty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "Balanced4" rank. The highest ranked group with the ranking score of 98-100, which is shown by the dark blue column in the chart, has given by far the best return, an average annual return of about 23%, while the average annual return of the S&P 500 index during the same period was about 2.5% (the red column at the left part of the chart). Also, the second and the third group (scored: 96-98 and 94-96) have given superior returns. This brings me to the conclusion that the ranking system is very useful.
After running the "Balanced4" ranking system on all Russell 1000 stocks, on July 21, I discovered the twenty best stocks, which are shown in the chart below. In this article, I will focus on the fifth stock of the list United Rentals, Inc. (NYSE:URI) since it released second-quarter financial results last week.
United Rentals, Inc. operates as an equipment rental company. It operates in two segments, General Rentals; and Trench Safety, Power and HVAC (heating, ventilating and air conditioning). The company was founded in 1997 and is headquartered in Stamford, Connecticut.
The table below presents the valuation metrics of URI, the data were taken from Yahoo Finance and finviz.com.
United Rentals's valuation metrics are excellent; the Enterprise Value/EBITDA ratio is low at 12.54. According to Yahoo Finance, URI's next financial year forward P/E is low at 13.50 and the average annual earnings growth estimates for the next 5 years is extremely high at 33.60%, these give an extremely low PEG ratio of 0.40. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
Latest Quarter Results
On July 16, United Rentals reported its second-quarter 2014 financial results, which beat EPS expectations by $0.19 (13.0%) and beat on revenues.
Total revenue was $1.399 billion and rental revenue was $1.179 billion, compared with $1.206 billion and $1.009 billion, respectively, for the same period last year. On a GAAP basis, the company reported second quarter net income of $94 million, or $0.90 per diluted share, compared with $83 million, or $0.78 per diluted share, for the same period last year. Adjusted EPS for the quarter was $1.65 per diluted share, compared with $1.12 per diluted share for the same period last year. Adjusted EBITDA was $663 million and adjusted EBITDA margin was 47.4%, a second quarter record.
In the report, Michael Kneeland, chief executive officer of United Rentals, said:
Our strong performance in the quarter reflects significantly more equipment on rent at better margins than a year ago, resulting in a new high water mark for second quarter EBITDA margin. The rebound in non-residential construction is continuing to drive up demand, particularly in the energy and commercial sectors. Given the vigorous activity we're seeing, and the benefit of secular penetration, we've raised our full year outlook - and we concur with the forecasts that show multiple years of healthy industry growth beyond 2014.
Dividend and Share Repurchase
United Rentals is not paying dividends, however the company has a share repurchase program.
During the first six months of 2014, the company repurchased $228 million of common stock as part of the $500 million share repurchase program that was announced in October 2013. The company's current intention is to complete the program by April 2015.
Competitors and Group Comparison
United Rentals is the largest equipment rental company in the United States with 12% market share. The second largest equipment rental company Sunbelt Rentals has 5% market share. Sunbelt Rentals is a wholly-owned subsidiary of Ashtead Group plc.
United Rentals' Growth Rates parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.
The charts below give some technical analysis information.
The URI stock price is 4.99% above its 20-day simple moving average, 8.75% above its 50-day simple moving average and 32.50% above its 200-day simple moving average. That indicates a strong short-term, mid-term and long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.42 and ascending, which is a bullish signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 79.27 which indicate overbought conditions.
Many analysts are covering the stock and most of them recommend it. Among the 17 analysts 7 rate it as a Strong Buy, 5 rate it as a Buy, and 5 analysts rate it as a Hold.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering URI stock there are only six analysts who have the four or five star rating, five of them recommend the stock, and one analyst has a Hold rating on the stock.
On July 17, Piper Jaffray analyst George Tong reiterated an Overweight rating in United Rentals and raised his price target to $124.00 following "robust" Q2 results. I consider Mr. Tong's analysis very valuable, since he has 4.5-Star rating from TipRanks for the accuracy of her previous calls.
United Rentals' stock has surged strongly since the start of 2013. In fact, its relative strength index (RSI) technical indicator is indicating overbought conditions. Since the beginning of the year URI's stock has gained 43.7% while the S&P 500 index has increased 7.0%, and the Nasdaq Composite Index has risen 6.1%. Moreover, since the start of 2013 URI's stock has gained an astounding 146.1% while the S&P 500 index has increased 38.7%, and the Nasdaq Composite Index has risen 46.8%.
According to United Rentals, the U.S. rental industry's revenue is poised to grow by an annual compound 9.2% rate. This revenue growth will benefit the company, which is expected to show an average compound annual earnings growth of 33.60%. In fact, United Rentals, in its second-quarter report, already increased its outlook as shown in the charts below.
Source: Investor Presentation Second Quarter 2014
On April 01, 2014, United Rentals announced that it has completed its previously announced acquisition of National Pump for a combined asset purchase price of approximately $780 million. In my opinion, this acquisition is very positive to URI, since its customers now have access to its full range of fleet, and we'll expand its cross-selling of pump assets to its broader customer base.
As the leader in U.S. rental industry, United Rentals will continue to benefit from the rebound in non-residential construction which is continuing to drive up demand, particularly in the energy and commercial sectors.
United Rentals has compelling valuation metrics and very strong earnings growth prospects; it has an extremely low PEG ratio of 0.40. Furthermore, the company is returning value to stockholders buy share repurchase. All these factors bring me to the conclusion that URI stock is a buy right now.