United Rentals On Inorganic Growth Path, Falling Rates Hurt

On Jun 23, we issued an updated research report on United Rentals, Inc. (NYSE:URI) , the largest equipment rental company in the world.

We are encouraged by the company’s leading market position, expansion via acquisitions and its large and diverse rental fleet. However, the highly fragmented and competitive equipment rental industry and declining rental rates act as a dampener.

Key Positives

As the largest equipment rental company in the world, United Rentals enjoys strong brand recognition, which enables it to attract customers and build customer loyalty. The company’s main strategy is to improve profitability of its core equipment rental business through revenue growth, margin expansion and operational efficiencies. Particularly, the company’s strategy calls for the implementation of Project XL, which is a set of eight specific work streams, focused on driving profitable growth through revenue opportunities and generating incremental profitability through cost savings.

Again, an opportunistic approach to acquisitions is an important part of United Rental’s growth strategy. In Apr 2017, United Rentals completed the acquisition of NES Rentals Holdings II, Inc. NES is one of the 10 large general equipment rental companies in the U.S., providing specialized aerial equipment to approximately 18,000 customers across the industrial and non-residential construction sectors.

The acquisition expands United Rentals’ geographic footprint in key markets like East Coast, Gulf States and Midwest. It is also expected to strengthen relationships with local and strategic accounts in the construction and industrial sectors, thus enhancing cross-selling capabilities.

The acquisition is also expected to leverage United Rentals’ technology and infrastructure. Management believes that the addition of NES will boost its revenues, earnings, EBITDA, free cash flow and overall scale. United Rentals expects to garner $40 million in cost savings from the NES transaction.

Meanwhile, demand for United Rentals’ products is largely related to the performance of the broader construction market. Construction activity picked up in 2016 and is expected to contribute to growth in 2017 as well. Positives like an improving economy, modest wage growth, low unemployment levels and positive consumer confidence raise optimism about the sector’s performance in 2017. As such, demand for United Rentals’ products as well as for companies like Masco Corporation (NYSE:MAS) , Owens Corning (NYSE:OC) and TopBuild Corp. (NYSE:BLD) should increase as well, thereby driving revenues.

Headwind

United Rentals has been experiencing declining rental rates in the recent quarters. In 2016, rental rates decreased 2.2% year over year. The decrease in rates reflected pressure from oil and gas sector, persistent Canada headwind, and the impact of recent industry fleet expansion. Notably, rental rates declined 1.4% in the first quarter of 2017 as well. Rental rate trended -1.8%, -1.5%, and -0.9% year over year in January, February and March, respectively. The fragmented nature of the industry may impact it ability to mitigate rental rate pressure.

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