'Stealth Risk' Could Ruin United Rentals Stock, Gordon Johnson Warns

Shares of United Rentals, a company that is engaged in the business of equipment rental, have already plunged more than 30 percent from a year ago. Ahead of the company's third quarter results (scheduled to be released after Wednesday's market close), Gordon Johnson of Axiom warned investors further downside is likely. In a report published Wednesday morning, Johnson stated that his earnings expectations are "essentially in line" with the Street's estimates all the way down to the EBIT line. The analyst is expecting the company to report revenue $1.65 billion, EBIT of $443 million and net interest expense of $147 million. However, Johnson is expecting the company to report a GAAP earnings per share of $1.77, which is "materially below" the Street's $2.19 estimate. The analyst noted that during the past cycle when non-residential construction building peaked, so did United Rentals' EBITDA. Johnson continued that with year over year growth in non-residential construction building at -33 percent, -14 percent, -15 percent, and -11 percent in September, August, July, and June 2015, respectively, he sees "outsized risk" to the Street's estimates that the company's EBITDA will grow from $2.8 billion in 2015 to $2.9 billion next year which also puts its third quarter results at risk. Johnson also noted that United Rentals has accumulated between $352 million to $841 million in balance sheet deferred tax cash liabilities (DTL) associated with its OEC fleet. The analyst suggested that this "creates a dilemma" for the company with respect to its current efforts to increase utilization. Johnson expanded that selling equipment with associated DTLs would "instantly trigger" a "potentially large" tax bill which will weigh on the firm's cash balance. In other words, the company's "sizeable" DTL balance (estimated at $1.7 billion) is a "stealth cash liability." Shares remain Sell rated with an unchanged $39 price target.