United Rentals, Inc. Looks Great in the Long Run

Great cash generation, market dominance, and industry tailwinds topped with attractive valuation make this company a good buy-and-hold stock.

Jan 30, 2014 at 3:00PM

Equipment rental company United Rentals (NYSE:URI) has the wind in its sails. As an industry behemoth, the company has been in prime position to benefit from a global economic recovery, and recent earnings show further proof that that is well under way. United Rentals is seeing growth not only in its rental segments but in outright sales as well, suggesting that construction companies and industrials are investing in what should remain an upward-trending macroeconomic environment. While highly susceptible to shifts in said environment, United is looking great today as a globally oriented cash-printing business.

Earnings recap
Last week, the market rallied as United Rentals delivered better than expected numbers across the board. Adjusted earnings grew a massive 25% on the back of $1.39 billion in revenue -- itself a 7% gain over the prior year's number. As mentioned above, driving the numbers was a healthy mix of rental sales and new equipment sales -- up 9.4% and 3%, respectively.

Gross margins improved while SG&A costs went down. Adjusted EBITDA grew 18% $651 million.

For the full year, sales leapt up 20% to $4.9 billion.

The most attractive element for United Rentals is its cash generation. Despite a substantial increase in the size of its fleet ($7.73 billion worth of equipment, up from $7.2 billion), the company posted positive free cash flow of $383 million for the year.

Looking ahead, management expects $5.25 billion-$5.45 billion in fiscal 2014 revenue, with adjusted EBITDA in the neighborhood of $2.45 billion-$2.55 billion.

Digesting the numbers
United Rentals gives investors much to think about. For one, it's not only the leader in its industry; it is ahead of competitors by a huge margin. The company's fleet is approaching half a million units. As mentioned in a recent interview with Morgan Stanley wealth management executive Marshall Kaplan, that's three times the size of the nearest competitor.

In what used to be a highly fractured market, this degree of industry dominance is a substantial competitive moat.

Another thing to focus on is valuation. For a company trading at under 11 times forward earnings (as comparison, the more diversified but less focused Hertz Global trades at 12.5 times forward earnings), United Rentals is a healthy-growing company with strong cash generation. Though 2013's free cash flow would indicate a relatively rich valuation when compared to its enterprise value, investors should keep in mind that United spent half a billion dollars on new equipment. These investments will without doubt add incremental cash flow to the company's financial statements.

In October, the company announced a $500 million share repurchase -- nearly 7% of its current market value. The stock does not pay a dividend, but investors shouldn't want one as the continued investment in new equipment further solidifies the company's market-leading position and long-term value proposition. United has also been making bolt-on acquisitions that have quickly broadened the range of product offerings.

All in all, United Rentals is looking good today as long-term play on a global economic rebound.

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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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