Slow and steady improvement in the U.S. economy should be the tide that lifts McGrath RentCorp's (NASDAQ:MGRC) business long term. But a decline in oil and gas prices can have a negative effect on the business as well. It's a tug-of-war that played out in the third quarter and held the company back from having an even better quarter than it could have.  

McGrath RentCorp results: The raw numbers


Q3 2015 Actuals

Q3 2014 Actuals

Growth (YOY)


$113.0 million

$113.0 million


Net income

$13.6 million

$13.7 million


Adjusted EPS




Source: Yahoo! Finance

What happened with McGrath RentCorp this quarter?
For every strong point in the quarter there was a point of weakness, which to some extent is to be expected in a diverse business.

  • Modular division had higher utilization, a larger fleet and lower equipment processing costs than a year ago. Revenue for the unit was up 19% to $30.2 million, the tenth consecutive quarter of year-over-year growth, and income from operations rose 86% to $12.2 million.
  • Electronics revenue grew 11% to $22.6 million and income from operations declined 29% to $7.1 million. The decline was primarily due to weak demand from wireless network companies, who aren't investing in upgrading their networks as quickly as they were a year ago.
  • Liquid and solid containment revenue was down 7% to $17.4 million and income from operations fell 30% to $5.1 million. This is the business that was most affected by the decline in oil prices and weaker demand across the energy supply chain.
  • Share repurchases reached 1.8 million during the third quarter, explaining the rise in EPS, and another 0.5 million have already been repurchased in the fourth quarter.

What management had to say
Improvement in the modular business was clearly the highlight of the quarter and management said that it's a payoff for previous investments the company has made. An increase in bookings from a year ago means that the business should continue to perform well and drive both revenue and earnings into 2016.

Weakness in industrial and oil and gas markets was bound to hit the business, and management was cautious to predict when a recovery might occur because oil prices show no signs of improving quickly. Management can cut costs to try to preserve profits, but to an extent the company is at the whims of the energy market trends.

Looking forward
Management said full-year earnings will be between $1.55 and $1.65 per share and the dividend is currently $0.25 per share each quarter. With steady operations and a payout ratio of less than 50%, the dividend should be safe for investors right now. The diversity of the business may be a drag on growth quarter to quarter, but overall it gives stability to the business.

For McGrath RentCorp to take a big step forward, we'll need to see demand increase in both electronics and liquid and solid containment. That may not be in the cards short term because wireless upgrades aren't happening at a rapid pace and oil prices are low.

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