The plunge in the shares in United Rentals (NYSE:URI) over the past 9 months has been interesting. Shares peaked at $105 last May and now trade around $48, a fall of around 55%. By looking at the stock price chart, one would think that the company is an oil E&P company or an MLP. This article will look at some of the possible reasons for the stock price collapse to see if the price action was justified.
- Is the company heavily exposed to the oil & gas sectors?
Looking at the company's presentation from December 2014, the company reported an 11% market exposure to the Oil & Gas sector. Upstream represents $275mm - $300mm of annualized revenue at risk.
That seems pretty manageable.
2. Did the company have sky-high expectations?
Reading the 2014 annual report, management guided to 2015 revenues of $6-6.2B, FCF of $725-775 and EBITDA of around $3B. What was the result? $5.8B in revenues, EBITDA was $2.8 B and FCF was $919 million.
Miss on top line & earnings but beat on FCF. This was certainly a reason for the stock to sell off. However, the company still makes a lot of money and kicks off a lot of cash even with some parts of their business (oil and gas, Canada) doing poorly.
3. Did the company have a sky-high valuation?
Currently, the stock trades at around 6x expected 2016 earnings. The market trades around 16x.
That looks cheap to me, not overhyped at all. There is little optimism being priced in at these levels.
The company still expects to generate over $900 million in FCF. A market cap of 4x FCF doesn't look expensive at all. It looks cheap.
4. Is the company over-indebted and likely to go bankrupt?
In 2011, the debt to EBITDA was 4.6x. In 2015, it was 2.8X and expected to go down to 2.7x in 2016. Debt seems to be under control.
5. Are the earning projections unrealistic?
This one is debatable, but the rental business is strong and not going anywhere. 1/3 of the rental income comes from aerial work platforms. About 50% comes from construction. The construction industry in the US is a strong point.
6. Does the company have a low ROE that is causing the low P/E multiple?
According to Bloomberg, last year the ROE was 35.7%.
In summary, I don't see a good reason for the magnitude of the price decline given how low the valuation is and how low expectations have been. The business is doing ok. It is not growing top line but due to the cash generation, the company is buying back stock and still growing EPS. FCF projection looks intact. The rental business isn't going away and is likely to grow in the future. There is lot of opportunity to roll up the smaller players in the space. United Rentals is the biggest player in the space, yet only controls 12% of the market. There is plenty to like. In the end, it comes down to the valuation of the business. Right now the company trades at a 4x FCF. 25% earnings yield on the equity. To me, it seems like a great entry point to buy the market leader in a very stable business that creates a lot of value for its customers.
Disclosure: I am/we are long URI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.