United Rentals (URI) announced third quarter results on October 17, 2012, and the company's stock soared 15.49% to close at $39.22. The company's stock has shown high volatility for the past twelve months now, with an annualized Beta of more than two; 5%-10% single-day moves are now common for this stock.
URI has traded in the $32-$38 range recently after reaching 52-week highs of $47. Should existing investors get out after this wild intra-day move, or should they hold?
3Q 2012 Important Highlights
- Rental revenue increased 8.9%, owing to year-over-year increases in rental rates (up 7.5%) and the rented equipment volume (up 7.9%). Total revenue was up 8.7%, and adjusted EBITDA was $570 million or 46.8%.
- The quality of the rental revenue improved considerably due to increased penetration of industrial accounts, and the company surpassed its own expectations of getting 30% industrial or non-construction accounts. While 50% of revenue came from industrial or non-construction accounts, 50% came from construction accounts (46% non-residential and 4% residential construction), showing a diversified end market for the company's rental operations, which is always good.
- The company reassured its pro forma outlook, with total revenue being $4.6-$4.7 billion, and adjusted EBITDA (an important measure of operating performance) being $1.95-$2.0 billion. Rental rates for 2012 are expected to be up 7% compared to 2011. In fact, flow-through (which is adjusted YOY EBITDA change divided by YOY revenue change) was an impressive 126.5%.
- The company achieved $45 million in cost savings, 34% of it owing to branch consolidation, and increased its cost savings target for the coming quarters. United Rentals acquired RSC Holdings in April 2012, and the integration is already showing improved rate, cost and utilization management.
President and CEO of United Rentals, Michael Kneeland was ecstatic about this during the earnings call:
"We realized another $45 million of savings in the third quarter and we now expect to reach a $100 of realized cost synergies in 2012 for our ultimate goal of $230 million to $250 million on a run rate basis. Our cost - our progress on the cost side and a magnitude of our flow through sale bought up our internal discipline in the quarter".
Rental Markets To Grow 8% 2012-2015
The company expects a compounded annual growth rate of 8% in the US and Canada rental market for the period 2012-2015. According to the company's investor presentation, oil, gas and power verticals are going to be the primary growth drivers for the sector, and 52% of the company's customers are expecting growth in the next 12 months. United Rentals, the largest equipment rental company in US and Canada, is well positioned to take maximum advantage of these market trends.
Customers in the industrials and construction sector tend to rent to benefit from a variety of factors, especially during times when credit is tight and there is lot of demand inconsistency in the markets.
- The main reason for renting is capital - renting does not require large amounts of capital and more importantly, it frees up capital to make it available for investment elsewhere.
- Cost control is another reason - a company that rents equipment does not incur costs related to repairs, maintenance or even storage of the heavy duty equipment.
- It is important for these companies to save time in case of equipment breakdowns - renting helps because companies like United Rentals provides mechanics (on site) in such situations.
- Usually a broad variety of equipment is needed for most of the industrial and construction operations, and renting helps getting only the right type of equipment rather than keeping a large equipment inventory.
United Rentals' business is cyclical in nature - the company sees revenue growth when there increased economic activity in the market and incurs revenue losses during recessions. The main reason why the company's stock reached extremely low levels in 2011 (as low as $14) was because of market fear surrounding recessionary factors such as reduced construction activity and lesser industrial demand.
Market panic can neither be predicted nor tamed, but should these factors come into picture again, United Rentals' stock will feel the pressure.
I have been writing on United Rentals since June 2012, and the stock has traded in the $32-$38 range during this time, with several 5-10% single day gains as well as losses.
- 06/21/2012 at $34.13: Top 12 Reasons United Rentals Must Be On Your Summer Shopping List
- 07/24/2012 at $28.20: Don't Worry About United Rentals
- 09/24/2012 at $36.24: United Rentals' 7% Jump - A Long Time Coming
At this point, I still believe that United Rentals has room to go higher in spite of this 15% jump. Construction and industrial activity is increasing and the RSC Holdings acquisition has significantly increased United Rentals' market share. The increased rental rates and the improved diversification in end markets makes the company better positioned compared to peers.
My take on United Rentals is very simple - as we come out of the recession, construction activity will continue to increase and the expansionary monetary policy of the Fed will help the industrial activity in the long run. As long as the company demonstrates and expects growth in the rental rates and key vertical markets, United Rentals will continue to outperform.
Investors in the URI trade must watch out for metrics such as rental rates, time utilization (which decreased for this quarter, albeit only slightly) and new accounts - the stock's appreciation is largely dependent on positive performance as well as the company's outlook regarding these metrics.
By the way, if you are musing about the title of this article, let's just say that I am way too much absorbed in the debates these days. Happy investing, folks!
Disclosure: I am long URI.