Watch Out Below? Longbow Analysts Downgrade United Rentals Two Weeks After Upgrading It

• The share price of United Rentals, Inc. URI has declined 45.9 percent over the past one year, to a low of $45.58 on January 28.
• Longbow’s Neil Frohnapple has downgraded the rating ont eh company from Buy to Neutral.
• The downgrade is based on the lower than anticipated rental rate outlook for 2016, with the company guiding to a decline in rental rate of 1-2 percent.

Analyst Neil Frohnapple mentioned that the “weaker than anticipated demand in Canada presents another source of potential risk to results over the next few quarters,” while adding that “yesterday's sell-off largely incorporates these incremental headwinds, but we think risk is to the downside as we move further along in the non-residential construction cycle.”

United Rentals reported its adjusted EBITDA at $744 million, below the consensus and the estimate, with lower than expected adjusted EPS at $2.19, primarily driven by lower than expected rental revenue and higher than anticipated tax rate.

“URI is positioned to continue to benefit from expected growth in U.S. non-residential construction; however, we think other headwinds including excessive industry fleet supply, negative rental rates, and further weakness in Canada will more than offset this in 2016,” Frohnapple said.

On a positive note, the company is expected to generate free cash flow of $900 million over the next two year, driven partly by lower fleet capex. Frohnapple believes that this would provide United Rentals adequate cash to complete its share buyback authorization of $1 billion and to pay down debt.