What: Shares of heavy-duty equipment and tools rental company United Rentals, (NYSE:URI) are down more than 13% so far today. If the decline holds, the company will have lost one-third of its market value this year:
So what: The company reported better than projected adjusted second quarter earnings on July 22, but GAAP (generally accepted accounting principles) earnings came up a little short, and declined from the year-ago period. But the big news was a downward revision on the company's guidance for the remainder of the year:
United Rentals sales are up from last year, and management says demand should be strong in the future especially as nonresidential construction picks up, but the company cut its outlook for the rest of 2015, largely on continuing weakness in locations that serve the energy industry, specifically oil and gas exploration & production, and oilfield services.
This is leading to cuts in pricing, which will bring down what the company had been expecting a year where it was able to increase rental rates 3%, to relatively flat pricing, and will also cut the company's time utilization metric, which measures the percentage of available time the company's equipment fleet is under rental contract. In response, the company is slightly reducing its planned investment in its equipment inventory, and will instead accelerate its share buyback program.
Now what: Management clearly thinks this sell-off is creating a buying opportunity. As of June 30, it had $197 million remaining on its existing $750 million buyback approval, and said it will complete that program by year-end. But that's just the start, as the board approved another round of buybacks, this time for $1 billion which will be completed within 18 months of initiation.
In other words, the company plans to spend $1.2 billion in share buybacks over the next two years. At current market value, that's almost 20% of the company's shares.
All things considered, this could be an opportunity to buy. If the market is indeed overselling on the weakness in demand in the energy industry, and nonresidential construction continues to recover, the share buyback program alone could make this a market-beating stock over the next few years.
However, there remains some uncertainty around the energy sector, so it's worth doing a little more research on your own before pulling the trigger. After all, it still has to come up with that billion bucks for the share buybacks, and already carries more than $8 billion in debt. I'd want to know how the company plans to pay for those shares before pulling the trigger.
Jason Hall has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.