United Rentals (NYSE:URI) was one of the first equity picks for our marketplace service. We made a long call in early February last year when the shares were trading around $44. In our subsequent write-up for the main part of the site, we highlighted the cheapness of the shares due to perceived perpetual weakness in the oil patch.
The company reported solid earnings of $153 million in the fourth quarter on January 25th helping send the shares to all-time highs. At $127, the shares have returned 188% since we made the call.
During the quarter, the company realized a 1.8% decline in rates overall with time utilization increasing to 69.3%. Adjusted EBITDA margins improved to 49.2%, up 30 bps, boosting the line item to $749 million. They also announced the acquisition of NES Rentals for $965 million in cash.
For the year, free cash flow totaled $1.182 billion on adjusted EBITDA of $2.76 billion at a 47.9% margin. Management provided their outlook for 2017 which called for adjusted EBITDA growth of -2% on the low end to +3.3% on the high end. They also guided to $650 million to $750 million in free cash flow as they significantly ramp up their net rental capital expenditures.
We think the market is pricing in significant GDP growth acceleration to bolster the underlying demand for their products, including from the oil and gas industry. Based on this expectation, we think the risk is firmly to the downside and will be taking our profits and moving to other opportunities.
One of our central near-term investing thesis is the contrarian view to the new 'animal spirits' narrative and reflation trade that has taken hold of the market. While we do not doubt that reduced regulations and a return to "pro-growth" policies will help amplify growth in the coming years, we think much of that is already priced in at current levels.
*Trade closed on January 26, 2017.
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Disclosure: I am/we are long URI BUT SELLING.
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