Investors globally are looking to the governments and the central banks for more help. And every time that happens, the central bankers are responding with either Twists or assurances of stepping in when required.
Then there are talks about Europe of course, and chaos in the BRIC countries, with China having their own landing as well as take off problems and India having issues with maintaining an investment grade for businesses worldwide.
Amidst all this chaos, what should you look for? A company such as Cummins Inc. (CMI), which has great promise but depends largely on China, or a gold miner such as Barrick Gold Corporation (ABX) that has been pushed to the sidelines in recent rallies in spite of being a North American/Canadian play?
Take a close look at United Rentals (URI). URI has had a stellar run since September 2011, jumping from the mid teens to as high as mid forties. But is this all speculation? What does this company do? Why did it have to jump from $14 to $48 in 8 months, from September 2011 to April 2012?
Since 1997, URI has acquired six established companies and (as of Jan 2012) has created a network of 529 equipment rental locations in 48 states in the US and 10 provinces in Canada. Yes, the exposure is strictly limited to US and Canada.
URI offers a broad array of about 3,000 different classes of rental equipment ranging from general construction and industrial equipment to traffic control and even general tools light equipment. The company is excellent in managing the age, composition and the size of its fleet of equipments - something its competitors have failed in doing at such a large scale.
URI dropped significantly in 2008 and 2009, for obvious reasons. In 2010, the equipment utilization modestly improved, especially commercial construction. In 2011, the company started beating analyst estimates and before bottoming to the mid-teens in September, the stock shot up like there is no ceiling.
This company is a must have in a portfolio if you are not already exposed to the construction equipment sector. If you are, I recommend you consider closing your existing position and looking into URI. Here are the top 12 reasons why:
- URI's competitors include many small scale and independent businesses scattered locally with only a few locations. They do not have the purchasing power of URI or the flexibility to transfer the equipments when there is high demand.
- Europe does not impact URI. Their business is strictly in US and Canada.
- Revenues rose 17% in 2011, because of better rental demand. URI's rental rates higher and profits turned positive in the 4th quarter of 2010, and have trended positive since.
- On April 30 2012, URI closed the acquisition of RSC Holdings (RRR), making United Rentals 50% larger in terms of revenues and fleet size. This acquisition has made United Rentals a 800 pound gorilla in its industry, and with improving market trends in the US (and other global regions outside of Europe), demand is just starting to pick up.
- URI has done a good job cutting costs over the past two years, resulting in a streamlined cost structure.
- Many companies are opting to rent rather than buy equipment because of financial costs involved in ownership. There has been continued improvement in the demand since past two years, and URI has beat analysts estimates consistently.
- Equipment rentals have been trending positively, but overall they are still weak and nonresidential construction has almost bottomed, if not already, which makes a strong case for URI. The rental industry has a lot of room to expand.
- 2011 operating EPS of URI was $1.85, and in 2012, this EPS could rise up as high as $3 or more. In 2013, Standard and Poors (S&P) and analysts at Credit Suisse expect the EPS to rise more than $4.00.
- URI capital expenditure is expected to peak in 2012, and beyond 2012, it is expected fall year over year and free cash flow is expected to trend positively.
- Rental prices are still more than 12% below the peak levels. And yet supply of equipment remains scarce, and demand has started increasing.
- In 2011, revenues increased 17% as stated above, and gross profits rose a whopping 36%, while EBITDA increased an impressive 69%. Seasoned investors look for growth in EBITDA as well as gross profits, not just sales, and URI has been impressive at all three fronts.
- S&P's Target price is above $60 for a 12 month range. Credit Suisse has a Target Price of $58.
So what is the best time to buy URI? I believe, over time.
URI's beta is 2.47, and it easily swings 10% both ways in a week's time. With the Fed's latest Twist, the market might be heading towards choppy trading, treading waters for next few weeks or going lower, causing good entry points for investors.
It is strongly recommended that you don't buy 100% of the position at one strike price, rather invest in increments of about 30%, at different price points. Why? Remember, in June 2011, we rallied too after dropping May, then stopped before making a new high. And in July again, we treaded water looking for opportunity but then the bottom fell like the end of the world is coming.
A wise investor would start making shopping list and wait for such opportunities, and since past performance does not guarantee future results, its better to start with small positions and grow the overall position through the fall.
URI is perfectly poised to create huge value for its shareholders. The stock has been trading in a range between $31 and $38 since the recent sell off from the mid forties. Watch this stock like a hawk and add it to your shopping list. Hold it into 2013 and even 2014. You will not regret.
Disclosure: I am long URI.