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United Rentals: Look Beyond The Cycle To The Secular Opportunity

Jun. 02, 2020 10:58 PM ETUnited Rentals, Inc. (URI)10 Comments
Value Ninja profile picture
Value Ninja


  • United Rentals is a market share leader in the North American equipment rental market with only 13% share. The opportunity for both organic and acquired share gains is significant.
  • Equipment rental is in the midst of a long-term secular growth story. Rental penetration is consistently increasing, providing United Rentals with a steady base of growth.
  • Management has done an excellent job, leading the industry away from a history of poor returns to a future focused on return on capital and free cash flow generation.
  • This year will be a bad one for earnings, but the market has already wrestled with this risk and is now attempting to value the recovery in 2021 and beyond. This has created an opportunity to buy the shares ahead of an economic expansion.
  • Valuations are near the low end of historical ranges. The rebound in the shares since the March lows has eroded an outsized opportunity for investors. But the shares still offer attractive returns for investors. Buy United Rentals.

Another stock that popped out of one of my thematic screens is United Rentals (NYSE:URI), as outlined in my earlier report "Turning Over Rocks - Hunting For New Ideas."

The company is one that fits into my theme "Why own when you can rent," which in my view includes the likes of software-as-a-service companies. URI, however, is of particular interest to me as it is optically very cheap and I would argue ticks the box for "counter-cyclicality" due to the nature of its cash flows - a point I will touch on in more detail later in the report.

I believe that URI represents a compelling long-term investment opportunity, supported by the following key drivers:

  • Strong management team and culture, leading the industry forward with a move away from an ill-disciplined focus on price alone, to a focus on profitability and returns.
  • Solid and steady growth driven by a consistent shift from equipment ownership to equipment rental.
  • Capital is being allocated towards higher margin, higher returning specialty rental businesses.
  • Prodigious FCF generation, and the somewhat counter-cyclical nature of FCF conversion, supports the target leverage ratio of 2.0-3.0x net debt/ EBITDA. The business generates significant capital through the cycle.
  • Excess capital is used to shrink the share count. Since 2016, share count has declined by 4% per year, or a cumulative reduction of 15%.
  • Valuation is extremely compelling when considering forward earnings potential of the business. The stock is on less than 10x earnings from FY2021 onwards, with a levered FCF yield in the teens.

And while the company is cyclical and the shares have a tendency to react aggressively to cyclical up- and down-swings, pullbacks have generally presented great buying opportunities. Typical corrections in the shares have ranged from 45% to 65%, and the most recent correction amounted to close to 65%. URI shares have

This article was written by

Value Ninja profile picture
An investment manager with over 20 years experience in equity investment, primarily focused on US equities. Investment approach is based on rigorous bottom-up analysis designed to identify mispriced securities with potential for significant long-term upside. Investment style is agnostic, with a preference for finding opportunities in both value and growth stocks.

Analyst’s 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.

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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Comments (10)

Fantastic article and very in depth. Thank you for sharing this piece and your research with us.
I am a long time URI share holder and closely follow the stock. Thanks for a thorough and great report. I think the risk reward ratio highly favors URI at these price levels.
Alfred Einstein profile picture
This was my best purchase during the recent selloff, I bought it in March and it's up 100% since then. It still isn't very expensive either... a single digit multiple (normalized) and good growth in an industry that should do well in this country for decades to come. I still like it right here, but obviously a little closer to $100 would be better for new investors.

I think they should partner with John Deere, that would be a mutually beneficial merger that would drive Deere sales higher and give URI a much greater footprint, especially ex US where they have basically no exposure. It would be a win/win and could be done in all stock so no new leverage would need to be added to either company. That might be something that takes a recession that last longer than 2 months to get done, but for $10-$15B it would be easily digested and well received by shareholders in both companies, and make a very compelling company. Something to think about.
$URI is a great play if we get a stimulus package focused on infrastructure as many have speculated. Possibly the only thing that both sides agree upon.
valuinvstr99 profile picture
Value Ninja
You did not specifically discuss the capital structure and the impact on the investment thesis. I would be interested in your thoughts on total debt/equity in excess of ~300%. I understand that high leverage is characteristic of the industry. And, I acknowledge that URI is a very strong FCF generator. Both are mitigating factors. While it appears that URI can and has serviced the debt, the amount of leverage is a concern worth addressing. High leverage boosts returns on equity in the 'good times', but can quickly cripple a business in less favorable business conditions. FYI, I am long URI, but have been hesitant to increase my position because of the leverage overhang and no dividend return.
Value Ninja profile picture

I did touch on this in terms of how they should be able to delever quickly with the strong FCF generation.

"The company targets net debt/ EBITDA in a range of 2.0-3.0x. I have the company straying slightly above the range, reaching 3.2x, in 2020. This doesn't bother me as the pace of deleverage is rapid in the recovery, even with the required fleet investment. I have net leverage declining to 2.6x in 2021, and then to 1.8x by 2024 - even with the company using 65% of its FCF to buy back stock from 2021 onwards. Without the buyback, URI's leverage ratio would reach 1.0x by 2024."

I think there is more flexibility in the model than many fear, though clearly if 2020 turns out much worse, then the leverage will go higher than 3.2x. The optics, however, won't be well received and that's why we should expect volatility to remain.
valuinvstr99 profile picture
Appreciate your added comments. FYI, my spread sheet returns current net debt/EBITDA [trailing 12 months] as 4.14 [(($804+$10646) - $513) / $2641]. Numbers sourced from Seeking Alpha Key Data section.
Value Ninja profile picture
Sorry, I should have clarified I use adjusted EBITDA.
Never Sell Investing profile picture
Nice article! I think the downside is less than is sometimes feared. The upside is really significant with a long runway ahead of them
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