In a stock market dominated by technology companies, it’s interesting to look at players in more old-school sectors. We’ve done that in recent weeks with analyses of everyone from pizza purveyor Dominos (NASDAQ: DPZ) to industrial conglomerate Honeywell (NASDAQ: HON).
Now take a peak at 28-year-old United Rentals (NYSE: URI), the world’s biggest equipment rental company, with a 16% share of the North American market.
Its assets include earthmoving equipment, aerial work platforms, forklifts and more. Its sectors include construction, infrastructure, manufacturing, and government projects. It even serves homeowners.
United has enjoyed great success throughout its existence, posting one of the best stock returns in the market. It has registered a whopping annualized total return of 48.5% for the past three years and 29% for the last 10 years.
The company has grown through thousands of acquisitions in what is still a fragmented sector, digesting its purchases smoothly. “It has increasingly integrated its locations, improved operations, and clearly realized cost advantages via economies of scale,” wrote Morningstar analyst George Maglares.
Strong revenue growth
So it’s no wonder that United has generated 11% compound annual revenue growth since 2012, triple the industry rate. “Its scale advantages allow the company to target larger, more sophisticated customers with a one-stop shop strategy of offering a wide array of equipment and services,” he said.
As it has grown, United has increasingly bought specialty rental companies. That allows the company to provide more complex solutions bundled for customers at their job sites, Maglares notes. And that in turn means higher pricing and higher profit margins for United.
He cites several examples, such as portable storage and bathroom facilities for a construction site and mobile power equipment at an industrial plant. United has put its profits to good use, investing in best-in-class technology, such as apps to get its inventory to customers more quickly and efficiently.
Another advantage for United Rentals: it’s generally the biggest customer for its main equipment suppliers, enabling it to gain price breaks. That also usually gives it “the most favorable terms for cancelling orders during downturns to preserve cash flow and financial flexibility,” Maglares said.
United was the first company in its industry to dump old equipment through sales to customers rather than auction markets with their hefty fees. It also benefits from the trend of end users renting their equipment, as opposed to owning it, which is more costly for them.
Buoyant end markets, speed bump
The strength of United’s end markets also is boosting its fortunes. That includes infrastructure, such as data centers; semiconductors; and power/energy. The company instituted a dividend in 2023, and has cut its financial leverage target
To be sure, United has hit a speed bump. While its revenue gained 6% in the third quarter from a year earlier, profit margins shrank.
That stemmed from large depreciation expenses from recent specialty acquisitions, inflation and more spending on provision of ancillary services, such as delivery and set-up.
It’s not an easy problem to solve, the company acknowledges. “It’s hard for us to predict what [costs] will look like between pickup and delivery or installation breakdown, setup, fueling, etc.,” CFO Ted Grace said in last week’s earnings call.
“The margins themselves don’t fluctuate a tremendous amount, but they are what they are.” United’s net income margin fell to 16.6% in the third quarter from 17.7% a year earlier.
Still, company officials think it can surmount its woes, and many analysts agree. “We anticipate a continued growth runway for United Rentals,” Maglares says. “That’s because ample opportunities exist to further consolidate the market and to take share from customers that would otherwise own their own equipment but prefer an outsourced solution.”
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