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McGrath RentCorp Earnings Surge in Second Quarter

By Travis Hoium – Aug 1, 2018 at 8:34AM

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Demand for tanks and telecommunications equipment is finally catching up to the mobile modular business.

McGrath RentCorp (MGRC -0.93%) is riding a growing economy to outstanding results in 2018. In the first half of the year, the company has seen strong demand across its business and its operating leverage is pushing net income sharply higher. 

Here's a look at highlights from the recently released second-quarter 2018 results. 

Green modular building in a city.

Image source: Getty Images.

McGrath RentCorp: The raw numbers

Metric Q2 2018 Q2 2017 Year-Over-Year Change
Sales $117.0 million $109.6 million  6.8% 
Net income $15.9 million  $11.5 million  38.8% 
Diluted EPS $0.34  $0.26  30.8% 

Data Source: McGrath RentCorp's Q2 2018 earnings release. 

What happened with McGrath RentCorp this quarter? 

McGrath RentCorp often faces challenges in at least one of its business segments and relies on other businesses to keep the company growing. But in the second quarter, it was hitting on all cylinders with growth in each segment. 

  • Mobile modular rental revenue was up 9% in the quarter to $38.2 million, service revenue was up 4% to $12.4 million, and sales revenue was down 6% to $9.0 million. Overall, division income from operations increased 4% to $11.8 million. Management said education and commercial markets are performing well and bookings for future sales were strong in the quarter. 
  • TRS-RenTelco division rental revenue jumped 12% to $22.2 million and sales revenue was up 22% to $6.8 million. Income from operations for the segment was up 19% to $8.5 million. 
  • Adler tank rental revenue was up 12% in the second quarter to $16.9 million and service revenue fell 3% to $6.0 million. Income from operations was up 34% to $4.1 million. Upstream oil and natural gas demand was strong and grew from 9% of total revenue to 10%. After years of weak demand in oil and gas, this is a welcome source of demand for the company. 

A growing economy has been a tailwind for McGrath RentCorp and it looks like that will continue for the foreseeable future. Given the natural leverage that will come from operating a business where major costs like depreciation are fixed, we could see net income growth continue to rise significantly faster than revenue for the rest of the year. 

What management had to say

The strong results in the second quarter seem to be the start of a great year for McGrath RentCorp with CEO Joe Hanna saying: 

We were pleased to see that second quarter demand for our rental solutions was strong, contributing to solid results for the first half of 2018, and setting the stage for the remainder of the year.

Unless the economy broadly slows down, management expects to see strong results for the rest of the year. One data point backing that up was a 31% increase in the dividend to $0.34 per share. 

Looking forward

Management reconfirmed guidance that operating profit will increase 11% to 15% in 2018. Based on the results above, it's a huge positive that TRS-RenTelco and Adler Tanks are going to lead that profit growth after years of relying on mobile module to keep the business afloat. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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