* All data are as of the close of Friday, February 13, 2015. Emphasis is on company fundamentals and financial data rather than commentary.
In our second comparison of the rather diverse Rental & Leasing Services industry we're going to look at the truck renters grouping, having already compared the 2 largest car rental companies the last time.
Where car renters are mostly consumer discretionary related, truck renters are very highly correlated to the health and welfare of the industrial sector. So much so, in fact, that of the three largest companies in the truck renting sub-industry - United Rentals, Inc. (NYSE: URI), Amerco (NASDAQ: UHAL), Ryder System, Inc. (NYSE: R) - both United and Ryder are components of the SPDR Industrial Sector ETF (NYSE: XLI). As a further sub-classification, all three truck renters are slotted to the Transportation branch of the Industrial Sector.
In addition to renting vans and trucks for residential moving and commercial shipping, other vehicles offered include backhoes, skid-steer loaders, forklifts, earthmoving equipment, material handling equipment, aerial work platforms, boom lifts and scissor lifts (provided by United), do-it-yourself moving and storage trucks and trailers (provided by UHAL), as well as transportation and supply chain management solutions such as fuel planning, fuel tax reporting, centralized billing, routing and scheduling, fleet sizing, safety, regulatory compliance, risk management, technology, and communication systems support (provided by Ryder).
As the economy recovered from its near-death experience in the 2008-09 economic crash, the transports were among the first out of the repair shop, since you cannot have a recovery without industrial production, and you cannot have industrial production without transportation.
Hence, since the recovery began in March of 2009 as graphed below, where the broader market S&P 500 index [black] has risen 208% and XLI [blue] has risen a stronger 272%, all three of our truck renters have outperformed both benchmarks - with Ryder [orange] rising 385%, UHAL [purple] rising 1,350%, and United [beige] pealing rubber ahead of all of them with a rise of 2,975%.
On an annualized basis, where the S&P has averaged 35.15% and XLI has averaged 45.97%, Ryder has averaged 65.07%, UHAL has averaged 228.17%, and United has averaged a smoking 502.82% per year!
Over the past year, however, the shakiness of United's main markets of construction and heavy industry have caused it to underperform its competitors as well as the two benchmarks. Where the S&P has risen 14% and XLI has risen 12%, United has gained a tad under 12%, while Ryder and UHAL have maintained their previous relationship to each other with gains of 31% and 38% respectively.
For future earnings growth, all three companies are expected to outperform the broader market with an almost perfect score, as tabled below where green indicates outperformance while yellow denotes underperformance relative to the broader market.
Ryder is the only one seen under-growing the S&P's average earnings growth in the current quarter, while accelerating to as much as 1.47 times its growth rate over the longer term.
United and UHAL, for their part, are expected to run neck-and-neck in the current quarter as they outgrow the market at some 2.03 to 2.45 times its rate. Yet over the longer term, the two are seen trading their leadership spots, as United outgrows all at some 1.46 times the market's average growth rate during the next reporting year (2015), where UHAL takes the lead over the next five years at some 1.85 times the S&P's average.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, United delivered the greatest trailing revenue and earnings growth year-over-year, where Ryder delivered the least, even earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, UHAL operated with the widest profit margin, United enjoyed the widest operating margins, while Ryder contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, United's management team delivered the greatest returns on assets and equity, where Ryder's delivered the worst.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, UHAL provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Ryder's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, United's stock is the cheapest relative to forward earnings and 5-year PEG, where Ryder's is cheapest relative to company book value. At the overpriced end of the scale, each company's stock is the most expensive relative to a different ratio.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, United offers the highest percentage of earnings over current stock price for the current quarter and the next reporting year (2015), while UHAL offers the lowest percentage for the same periods.
Since UHAL's next quarter earnings estimate is not available, the metric does not factor into the comparison. Though it is worth noting that United offers a slightly higher percentage than does Ryder.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, United offers the greatest growth over the near term, where UHAL offers it over the next five years. At the low end of the scale, where Ryder offers the slowest growth overall, UHAL offers it in the next reporting year (2015).
Since UHAL's next quarter earnings growth is not available, the metric does not factor into the comparison. Though it is worth noting that both United and Ryder were tied.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe United's stock offers the greatest upside potential and greatest downside risk, where UHAL's offers the least upside and least downside.
It must be noted, however, that both UHAL and Ryder are already trading below their low targets. While this may mean increased potential for sharp moves upward, it may warrant reassessments of future expectations.
It must also be noted that UHAL has only one broker making prognostications, which potentially limits the targets' accuracy.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, UHAL is best recommended with 1 strong buy and 1 buy representing a combined 100% of its 2 analysts, followed by Ryder with 8 strong buy and 4 buy ratings representing a combined 80% of its 15 analysts, and lastly by United with 7 strong buy and 4 buy recommendations representing 61.11% of its 18 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… United as it leaves its competitors in its dust, outperforming in 15 metrics and underperforming in 5 for a net score of +10, with UHAL hauling a distant second, outperforming in 9 metrics and underperforming in 10 for a net score of -1, and Ryder left with not much to ride on, outperforming in 5 metrics and underperforming in 15 for a net score of -10.
Where the Rental & Leasing Services industry is expected to outperform the S&P broader market meaningfully this quarter, underperform meaningfully next quarter, then outperform moderately beyond, the three largest companies in the space are expected to outgrow the market's earnings growth with an almost perfect stretch - with United and UHAL growing the most near term, while all three keep their earnings pedals to the metal longer term.
Yet after taking all company fundamentals into account, United Rentals, Inc. delivers the soundest financials, given its lowest stock price to forward earnings and 5-year PEG, highest trailing revenue and earnings growth, widest operating margin, greatest returns on assets and equity, highest future earnings over current stock price overall, highest future earnings growth overall, and best high and mean analyst price targets - decisively winning the Truck Rental sub-industry competition.