United Rentals Beats on Earnings, Shares Up - Analyst Blog

The share price of United Rentals, Inc. URI went up 2% as the company reported a 55% year-over-year increase in its first-quarter 2014 adjusted earnings to 90 cents per share on Apr 16, beating the Zacks Consensus Estimate of 70 cents, an earnings surprise of 29%.
 
GAAP earnings (including RSC merger related costs, restructuring and asset impairment charges and loss on repurchase/redemption of debt securities) came in at 56 cents per share, compared with the prior-year quarter earnings of 19 cents per share.
 
Operational Update
 
Total revenue improved 7% year over year to $1.178 billion in the quarter. The year-over-year rise was mainly due to growth in both equipment rentals (9.7%) and sales of new equipment (24%), offset by a decline in sales of rental equipment (11%) and contractor supplies sales (5%). Revenues beat the Zacks Consensus Estimate of $1.169 billion.
 
Cost of sales increased 2% to $730 million from $715 million in the year-ago quarter. Gross profit improved 16% year over year to $448 million. Consequently, gross margin expanded 300 basis points (bps) to 38% in the quarter.
 
Selling, general and administrative expenses went up 5% year over year to $168 million. Adjusted operating profit rose 24% to $280 million in the quarter. Operating margin increased 330 bps to 23.8% in the quarter.
 
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the reported quarter improved 15% to $519 million from $451 million in the year-ago quarter. Adjusted EBITDA margin was a first-quarter record of 44.1% in the quarter, rising 300 bps from the year-ago quarter.
 
Time utilization increased 40 bps year over year to 64.6% in the quarter. The size of the rental fleet was $7.77 billion as of the quarter-end, compared with $7.73 billion at 2013-end.
 
Segmental Performance
 
Revenues in the General Rentals segment increased 8.2% year over year to $924 million in the reported quarter. Gross profit for the segment increased 16.6% to $344 million from $295 million in the year-ago quarter.
 
The Trench Safety, Power & HVAC segment's revenues climbed 31% to $81 million in the quarter from $62 million in the year-ago quarter. Gross profit for the segment improved 35% to $35 million from $26 million in the prior-year quarter.
 
Financial Update
 
Cash and cash equivalents were $227 million as of Mar 31, 2014, compared with $175 million as of Dec 31, 2013. Long-term debt was $6.77 billion as of Mar 31, 2014 versus $6.57 billion as of Dec 31, 2013. Cash flow from operating activities was $508 million in the reported quarter, up from $409 million in the prior-year quarter. For the quarter, free cash flow was $278 million, compared with $234 million in the prior-year quarter.
 
In Oct 2013, United Rentals' board of directors had approved a $500 million share repurchase program. Under this program, during the first quarter, the company repurchased common stock worth $43 million. United Rentals plans to complete the program by Apr 2015.
 
Outlook

United Rentals maintained its guidance of revenues in the range of $5.45 billion to $5.65 billion in fiscal 2014. Adjusted EBITDA guidance for the full year is projected in the range of $2.55–$2.65 billion. The company expects an increase in rental rates of approximately 4% year over year and time utilization of around 68.5%.
 
Net rental capital expenditures are expected at approximately $1.2 billion, after gross purchases of approximately $1.7 billion; and the company expects free cash flow in the range of $425 million to $475 million.

Our Take

United Rentals will benefit from the acquisition of National Pump. The deal marks United Rentals' venture into the pump rental sector, catapulting it to the position of the second largest provider of pump rentals in North America. The sector looks promising given the rising demand from energy and petrochemical companies that are capitalizing on the booming shale gas market in the U.S. The deal is expected to be accretive to United Rentals' free cash flow and earnings per share in 2014.

United Rentals will benefit from the implementation of growth strategies, higher rental rates, free cash flow generation, returning cash to shareholders and integrating acquisitions. Notably, the company will continue to focus on reducing the cycle time for renting equipment, improving accuracy, service quality and efficiency and cost control, which will lead to an increase in gross margin. The company is also poised to benefit from a rebound in non-residential construction.
 
Greenwich, CT.-based United Rentals is the largest equipment rental company in the world, with an integrated network of 832 rentals. The company offers leases on about 3,100 classes of equipment with total original cost of $7.73 billion.
 
United Rentals currently carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the sector include Rentrak Corp. RENT, CopyTele, Inc. (COPY) and Gibraltar Industries, Inc. ROCK. While Rentrak has a Zacks Rank #1 (Strong Buy), CopyTele and Gibraltar Industries hold the same rank as United Rentals.