Why Rent When You Can Buy?

Source: Wikimedia Commons

United Rentals (NYSE: URI  ) , the largest equipment-rental company in the world, announced that it will acquire National Pump in a transaction valued at no less than $780 million. As the second-largest pump-rental business in North America, National Pump will make a nice addition to United's operations and will allow the company to carve for itself a strong foothold in the oil and gas industry.

Terms of the agreement are rich!
According to United, its acquisition of National Pump will be completed using cash from existing sources as well as through the assumption of debt. With a purchase price of $780 million on top of contingent payments of up to $125 million should certain targets be met, the deal represents almost 11% of United's market cap.

Under the assumption that the business can still grow rapidly, United's management claimed that it expects National Pump's sales to double over the next five years. At first glance, this may seem like an amazing outcome, but there is great uncertainty tied to this assertion. And even if sales do rise significantly, they're unlikely to have a material impact on United.

You see, as a result of the acquisition, United doesn't expect its operating results to change all that much.

Management revised its full-year sales outlook from a range of $5.25 billion to $5.45 billion announced at the time of fourth-quarter earnings to full-year revenue of between $5.45 billion and 5.65 billion. 

The transaction will be completed sometime during the second quarter of the year, which means that it will only be on the books for around six months in 2014. This means that the revenue United receives for half a year will be around $20 million.

Under the assumption that National Pump's sales aren't too different during the first half of the year, United will only be realizing sales of around $40 million from the business each year should its growth expectations fail to prove correct. In essence, this implies a price/sales for the company of 19.5 to 22.6 times, which is quite expensive.

Source: National Pump

Can United even afford National Pump?
One problem with United's acquisition of the company is that all but $15 million of the initial purchase price will be comprised of cash. With $175 million of cash on its balance sheet, there is no doubt that the company will have to assume a significant amount of debt in order to make the transaction go through.

As of its most recent quarter, United already had approximately $6.6 billion in long-term debt on its balance sheet. This is so large, in fact, that the company's long-term debt/equity ratio currently stands at 3.2; meaning that, for every dollar in assets less liabilities, the business has $3.20 in debt. Fortunately, this level of debt is lower than the $10.5 billion held by Hertz Global Holdings (NYSE: HTZ  ) , but it could mean trouble for the company moving forward. Hertz's debt implies a debt/equity ratio of 3.7.

Currently, United's interest expense is already so high that it amounts to nearly 10% of sales, effectively lowering the net profit margin to 8%. In contrast, Hertz's interest expense stands at only 7% of sales, but other costs have pressed the company's net profit margin down to only 3%.

Foolish takeaway
Based on the data provided by United, it looks like National Pump's high growth could make the company a worthwhile investment, but the downsides are numerous. On top of paying a very high multiple for the business, the company will become even more leveraged than it was in the past.

On the plus side, it looks as though United can afford some mistakes because of the fact that it is far more profitable than Hertz. But United is acquiring National Pump because it expects success, not failure. For this reason, combined with the fact that United looks more appealing than Hertz, the Foolish investor should feel somewhat comfortable about its deal but should be cognizant of any risks involved.

Is United Rentals a stock to own forever?
In spite of the downsides that might harm United stemming from its acquisition, the business is a strong one that has grown rapidly in recent years. Does this make it the kind of investment Warren Buffett might champion, or are there better opportunities out there for the Foolish investor?

As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2014, at 1:12 AM, mikefee wrote:


    Thanks for writing this insightful article. United Rentals is a stock that a bought recently for a lot of the catalysts that you mentioned. I will be watching the commentary about the National Pump acquisition closely as well.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2876981, ~/Articles/ArticleHandler.aspx, 9/4/2015 1:57:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel Jones

Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!

Today's Market

updated 4 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:03 PM
HTZ $17.96 Up +0.07 +0.39%
Hertz Global Holdi… CAPS Rating: ***
URI $67.83 Up +0.47 +0.70%
United Rentals, In… CAPS Rating: ***