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McGrath RentCorp Resoundingly Busted Its Trend

Mar. 01, 2018 4:42 AM ETMcGrath RentCorp (MGRC)
Jenks Jumps profile picture
Jenks Jumps


  • When my investment club researched McGrath RentCorp last summer, we were drawn to many things but were not impressed at all with its dividend growth rate.
  • As transforming DGI investors, we consider valuation, yield and a clear potential for dividends to grow in our GRAVY model.
  • Though McGrath had not been growing its dividend at a healthy rate, we saw there was indeed clear potential for its five-year trend of just 2.1% to be broken.
  • Between its focus and performance on ROIC, tax reform and improving industry outlooks, McGrath resoundingly busted the trend.

In November, I embarrassingly confessed my investment club had “chased” an investment in McGrath RentCorp (NASDAQ:MGRC) in September 2017. In hindsight, our interest in the business-to-business rental equipment provider emerged just in time. Its share price has not dropped below the $40 mark since we invested. Furthermore, McGrath reported healthy full-year results on February 27th as well as optimistic projections for 2018.

Recent Results

Typically, McGrath experiences a seasonal impact in the fourth quarter. But, the last quarters in 2016 and 2017 did not follow suit. Rental revenue sequentially increased quarter to quarter in both years with the most recent quarter hitting $77.7 million. Based on information provided in the third quarter, full-year revenue was expected to top $460 million and EPS approach the $2.00 range. Full-year revenue totaled $462 million and earnings per share, exclusive of the tax reform impact, barreled through the $2.00 range.

The impact of tax reform was significant for McGrath. The following table details several views for consideration.

Actuals Reported YE 2017

Based on 2017 effective tax rate

Based on 2018 effective tax rate

Projected 2018

Income before provision of income taxes




$90M - $92M

Effective tax rate





Tax Provision




$24.3M - $24.9M

Net income




$65.7M - $67.3M

EPS per diluted share




$2.68 - $2.75

Outstanding Share Count






Source: Author-created from company data

While tax reform was an external contributor, the company's focus on ROIC was well within its control. Efforts began in early 2016 when the key performance metric fell below 5% at year-end 2015. Results from the first year would take time to flow through the business but were expected to have long-term impact. By year-end 2017, the ROIC metric had, indeed, improved 139 basis points.

This article was written by

Jenks Jumps profile picture
I am a self-taught investor. As a member of an investment club, I provide the majority of research to the club. When I started writing for SA, the club was interested in stocks offering growth at a reasonable price (GARP) and stocks that were undervalued. We have since adopted a dividend growth investing (DGI) strategy. We search for GRAVY - our acronym for "GR"owth "A"bility, "V"alue and "Y"ield. I am very interested in other active investors critiquing my research. I believe this critique will make me a better investor for my own interests as well as the club's.

Analyst’s Disclosure: I am/we are long MGRC. 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.

I belong to an investment club that owns shares in MGRC.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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