United Rentals (NYSE:URI) is the largest equipment rental company in the world, with more than 3,100 categories of diverse equipment available for rent. It operates 876 rental locations in the U.S. and Canada.
The company serves a diverse customer base, ranging from Fortune 500 companies to small businesses and homeowners. It primarily serves the industrial/non-construction and non-residential construction markets. The company has 12,200 employees, servicing over 300 metropolitan areas, 49 states, and 10 Canadian provinces.
A highly fragmented industry
The equipment rental industry is highly fragmented, providing a significant opportunity for consolidation and growth, a key reason why the company was formed in 1997 by eight people. United Rentals expects the rental industry to grow at 8.8% CAGR from 2014-2017. It has a 13% market share of construction and industrial equipment rentals in North America, so there is still a lot of room to grow. With an impressive fleet portfolio consisting of 410,000 units worth $7.77 billion, it's easy to understand why United Rentals is the leader in the rental business. Some of the products that customers are renting range from construction equipment made by Caterpillar (NYSE:CAT) to trucks made by Ford. (NYSE:F) Competition is mostly from Hertz (NYSE:HTZ) but their primary rental market is vehicles, with only a small presence in the equipment rental business.
Commercial construction is picking up
Commercial construction, which accounts for about half its business, appears to be in a broader recovery. Construction spending rose to its highest level in five years in April, but the increase was less than expected, suggesting a mild pick-up after residential and nonresidential construction contracted in the first quarter. On June 2, the Commerce Department reported that construction spending increased 0.2% to an annual rate of $953.5 billion, the highest level since March 2009. While the increase was less than economists' expectations for a 0.6% gain, March's construction spending was revised to show a 0.6% rise instead of the previously reported 0.2% advance. Commercial construction is typically the last end market to pick up steam in an up-cycle.
The company overcame an unusually harsh winter and generated solid numbers in every major category in Q1 2014. Approximately 85% of the company's revenues are from rentals, with the remainder being derived from sales of aging inventory, etc. So let's focus on the rental revenue business:
Rental revenue was $1 billion, 9.7% higher than during the same period last year. The company reported $519 million of adjusted EBITDA in the quarter and 44.1% margin, which is a record first-quarter result. This is an improvement of 310 basis points compared to last year. When management was asked where margins could be by 2015, the company responded that it "... certainly over the longer haul think[s] that 60% is a good way to think about things." Investors should like these numbers, because higher margins lead to higher profits, allowing the company to grow.
United Rentals purchased $43 million of common stock during the quarter. Combining this amount with Q4 2013, the company repurchased about $90 million of shares of the $500 million share repurchase authorization. Investors can expect that repurchase activity will pick up, since the company stated that they intend to complete the entire $500 million authorization by April, 2015.
Same-store growth for the trench safety, power and HVAC business was up 19% year over year, and the company plans to open at least 18 new branches this year. United Rentals plans to double the size of its high-margin specialty segment within five years.
The outlook for United Rentals looks strong. It is a simple business which serves many different markets. Investors should keep an eye on construction data as it is being reported. It appears that the company is in the early innings of a construction recovery.