United Rentals on a tear again

Since 2013, one of my favorite investments in cyclical companies has been United Rentals, Inc. (URI), the largest equipment rental company in North America with an integrated network of 997 rental locations in 49 States and all Canadian provinces. Investing in cyclical companies demands vigilance for entry and exit periods. Since 2013, I’ve been in, out and back in. Back on 12/17/2016, I brought URI to the attention of this board.
[ Note: my first URI post was at the Value Hounds board back on 8/5/2014
http://discussion.fool.com/rent-instead-of-buy-31358173.aspx ]

Here’s an update of the my conclusion in the 12/17/2016 post.

While United Rentals may not be the high-octane revenue growth performer preferred by this board, the company has other favorable strengths, i.e.,
• A viable Capital Allocation Strategy
• Strong positive FCF
• Relatively stable margins
• Operating in the black with low EV/EBITDA, low P/E, low P/S and growing diluted EPS.
• Three substantial 52-week run ups in stock price during periods that I’ve held URI, i.e., 119% in 2013-14, 162% in 2016, and recently 90% (for details see Corporate Financials section of this post).

Beside these financials and IMO, more importantly, URI is positioned well with a vast integrated network of rental locations in 49 States to greatly benefit as Washington enacts and implements a major infrastructure improvement program across the country. URI made two acquisitions in 2017 to bolster its inventory of earthmoving and aerial equipments.

Every four years, the American Society of Civil Engineers issues a report card on the condition of the nation’s infrastructure.
In 2013, the country received a sad D+. This was raised as an major issue during the 2016 presidential campaign.
The recently released 2017 report card is no better … another dismal D+. We better wake up, America!


For the latest details about the company and industry background, go to the following corporate presentation website:

The URI CAPITAL ALLOCATION STRATEGY consists of the following:

   • Target leverage range over the cycle of 2.5x–3.5x
   • Credit ratings of BB- by S&P and Ba3 by Moody’s
   • No significant Notes maturing until 2023

   • Organic
     - Continued organic investments to support growth and boost productivity
     - Opened 16 specialty branches in 2017

     - Balanced strategy creates flexibility to pursue strategic assets as opportunities arise
     - Closed acquisition of NES Rentals in April 2017 (see Note 1 below)
     - Closed acquisition of Neff Corp. in October 2017 (see Note 2 below)

   • Executed $655M of $1B share repurchase program
   • Program to be completed by year end 2018


  1. In April 2017, URI completed the $960 million acquisition of NES Rentals Holdings II, Inc. one of the 10 largest equipment rental companies in the U.S., specializing in aerial equipment with 73 branches located throughout the eastern half of the U.S. and approximately 1,100 employees This acquisition is expected to increase URI’s density in strategically important markets, including the East Coast, Gulf States and the Midwest and to strengthen URI relationships with local and strategic accounts in the construction and industrial sectors, which URI expects will enhance cross-selling opportunities and drive revenue synergies.

  2. In October 2017, URI completed the $1.3 billion acquisition of Neff Corporation, a provider of earthmoving, material handling, aerial and other equipment with 69 branches located in 14 states, with a concentration in southern geographies. Neff had approximately 1,100 employees and approximately $860 million of rental assets at original equipment cost as of September 30, 2017. Neff had annual revenues of approximately $413 million. This acquisition is expected to augment URI earthmoving capabilities and efficiencies of scale in key market areas, particularly fast-growing southern geographies and is expected to lead to revenue synergies through the cross-selling of the URI broader fleet.

The URI HISTORICAL CAPITAL ALLOCATION 2010-2017 consists of the following:

   • 79& Cash from Operations
   • 21% Debt Issuance

   * 52% CapEx
   • 33% Cash Acquisitions
   • 15% Share Repurchases

100% equals $ 14.3 billion.



Here are the 4Q and full year 2017 financial results:
URI noted: The company completed the acquisitions of NES Rentals Holdings II, Inc. (“NES ”) and Neff Corporation (“Neff”) in April 2017 and October 2017, respectively. NES and Neff are included in the company’s results subsequent to the acquisition dates. Pro forma results reflect the combination of United Rentals, NES and Neff for all periods presented.

Here’s the 10K FY 2017:

I strongly recommend reading the transcript for Q4 2017 Earnings Conference Call 1/25/2018.

On the Q4 2017 Earnings Conference Call 1/25/2018, CFO Plummer commented:

“Free cash flow in the quarter; just briefly on that, $983 million for the year that includes however $76 million worth of payments that we made for merger related and restructuring items. If you take that $76 million out obviously that leaves $907 million which is still a very robust free cash flow performance in. So we’re very pleased about the free cash flow that we generated in '17 and look forward to an even more robust free cash flow performance in ’18."
“Finally, just a comment on free cash flow and capital allocation; there is a lot of interest and what are we going to do with all this cash flow; we’re guiding to $1.3 billion or $1.4 billion of free cash flow as the range for 2018. I think it’s fair to say that as we look at the possible uses of that cash flow our mindset for how to make decisions about capital allocations has not changed. We still want to make sure first and foremost that the leverage of our business is appropriate for where we are in the cycle, we believe the answer to that is yes. Then we want to make sure that we’re making the right decision about the amount of organic growth to put it in the business through CapEx is appropriate, we believe the range that we’ve given you for CapEx is very appropriate in the market environment we expect.
M&A is always part of our thinking about uses for cash flow and we certainly will be ready to do acquisitions that makes sense but they need to make sense, we’ve been very disciplined about that. And finally share repurchase, we’ve talked about completing the existing program $300 million remaining as we sit today; whether and how much more we might do beyond that is the subject of a discussion that we’ll continue to have with the board as we go forward throughout the course of the year. If we deliver the guidance that we talked about here, we should finish the year with our leverage ratio of something like 2.2 times at the end of the year, that would be very low versus the range that we’ve historically talked about it 2.5 to 3.5 times. So we’ll have a very active discussion throughout the year about where we allocate the use of this cash flow and what level of leverage we think is appropriate for where we are in the cycle.”


The following table shows the following significant changes to date since financials given in my prior posts on TMF boards:

• Since 12/16/2016, Market Cap has substantially grown to $15.8 billion.

• Over the 52-week periods shown below, stock prices were rising and realized substantial gains, i.e., 119%, 162% and 90% respectively for dates 8/5/2014, 12/16/2016 and 3/21/2018.

• Closing prices on the dates shown in the table below were near 52-week highs and still yielded very low to acceptable ratios for EV/EBITA, P/E and P/S.

                    3/21/2018    12/16/2016       8/5/2014    

Market Cap            $15.8 B       $ 8.9 B      $ 10.14 B

52-week High	       190.74        109.90	    114.95
Closing Price 	       187.27        105.71	    105.77
52-week Low	       100.62         41.90	     52.39

EV/EBITDA (mrq)         12.74          9.74 	     12.21
P/E (ttm)	        11.91         16.31	     26.38
Fwd P/E	                11.47         12.29		
P/B (mrq)	         5.09          5.82	      5.72
P/S (ttm)	         2.38          1.55	      1.96

For Q4 and FY 2017, I’ll reiterate that URI completed the acquisitions of NES Rentals Holdings II, Inc. and Neff Corporation in April 2017 and October 2017, respectively. NES and Neff are included in the company’s results subsequent to the acquisition dates. Pro forma results reflect the combination of United Rentals, NES and Neff for all periods presented.

              REVENUE   Change   NET INCOME    Change	 EPS	  Change
FY               ($ B)     YoY         ($ B)	(YoY)  Diluted	    YoY

2017	        6.641	 15.2%	      1.346    137.8%   15.73     143.8%
2016	        5.762    -1.0%	      0.566    - 3.2%	 6.45	    6.3%
2015	        5.817	  2.3%	      0.585	 8.3%	 6.07	   17.9%
2014	        5.685    14.7%	      0.540	39.5%	 5.15	   41.5%	
2013	        4.955	 20.4%	      0.387    416.0%	 3.64     360.8%
2012	        4.117	 57.7%        0.075.   -25.7%	 0.79	  -42.8%
2011	        2.611		      0.101		 1.38

Overall, GAAP-based margins have stabilized, except for the 2017 profit margin of 20.27% that resulted from NES and Neff acquisitions. For FY 2017, URI reported that the adjusted gross margin was 54.9% compared to 48.2% for FY 2016; the year-over-year increase in adjusted gross margin primarily reflected the impact of selling NES equipment.

2017	 40.00%	   22.69%	20.27%
2016     41.10%	   24.56%	 9.82%
2015	 42.63%	   26.10%	10.06%
2014	 42.78%	   24.47%	 9.50%
2013	 40.10%	   21.76%	 7.81%
2012	 38.55%	   14.36%	 1.82%
2011	 34.39%	   15.17%	 3.87%

As show below, URI currently earns $6.86 per $100 invested.

             3/21/2018     12/16/2016
ROIC	       18.87%           9.19%		
WACC	       12.01%	       13.35%		
EVA	        6.86%	       -4.16%


2017   18.2%    14.4%	     3.8%
2016	9.5%	11.1%	    -1.6%
2015	9.7%	 7.9%	     1.8%
2014	9.6%    10.8%       -1.2%

URI has strong free cash flow. FCF for the full years 2017 and 2016 included aggregate merger and restructuring related payments of $76 million and $13 million, respectively.

2017	907 M    
2016	614 M
2015    359 M
2014   ( 20 M)
2013   (133 M)   
2012   (648 M)



As shown in the table below, URI currently has very high debt/equity and high debt/capitalization.
Since 2010, the company has established, prioritized and continued a net leverage management policy that provides 2.5x to 3.5x target net leverage range in its capital allocation. The net leverage ratio has been trending downward to the lower end 2.5x and is expected to continue downward in 2018 as cited by the URI CFO on the latest earnings call that “we should finish the year with our leverage ratio of something like 2.2 times at the end of the year, that would be very low versus the range that we’ve historically talked about it 2.5 to 3.5 times.”

CAPITAL STRUCTURE            3/21/2018        12/16/2016

Cash (mrq) 	               $ 352 M	         $ 297 M
Working Capital (mrq)	       $ 104 M		 ($ 66 M)
Total Debt (mrq)	    $  9.440 B 	       $ 8.002 B
Total Equity (mrq)	     $ 3.106 B	       $ 1.539 B
Total Capitalization (mrq)  $ 12.546 B	       $ 9.539 B
Debt/Equity (mrq)	          304%              519%
Debt/Capitalization (mrs)          75%  	     83%
Current Ratio (mrq)	         1.06              0.95

Stock-based compensation is very reasonable and acceptable, since URI operates in the black.

FY	Compensation    SBC/revenue        

2017	$ 87 M			1.3%
2016    $ 45 M			0.7%
2015    $ 49 M			0.8%
2014	$ 74 M			1.3%


Since my URI conclusion is at the beginning of my post, I’ll end here by saying that URI is akin to my other holdings that I’ve posted here - Align Technology and Grubhub - in that all these companies are operating in the black with strong FCF, positive earnings and, for me, highly favorable/acceptable/rewarding stock price gains. These companies also are easy-to-understand businesses.

FWIW, as of 3/17/2018, CFRA Equity and Fund Research Services (its predecessor was S&P Capital IQ Equity Research) gives URI a strong buy recommendation and a most undervalued fair valued rank, based on their fair value calculation of $257.51 that suggests that URI is undervalued by $71.22 or 38.2%. Back in 2013, my initial URI investment was prompted by an in-depth analysis presented on 9/17/13 at the Value Investing Congress that valued URI with an implied stock price of $96.34 versus the $56 current price, a 72% premium to current. Thereafter, URI reached a 52-week high $114.95, and closed at $105.77 on 8/5/2014, when I made my aforementioned first URI post at the TMF Value Hounds board.

Update: Since Wednesday 3/21/2018, the URI stock price dropped $7.01 from $187.27 to $180.26 on Thursday, dropped $6.08 to $174.18 on Friday, and on Monday 3/26/18 rebounded upward $6.39 closing at $180.57.

As always, conduct your own due diligence and decision-making.