Rental Demand Has Slowed, Leading Goldman Sachs To Downgrade United Rentals

Industry rental demand is estimated to have slowed down from an average $3 billion per year in 2010-2014 to less than $1 billion per year currently. Goldman Sachs’ Jerry Revich downgraded the rating for United Rentals, Inc. URI from Neutral to Sell, with a price target of $58, saying that softening demand growth would have a negative impact on the industry’s investment returns.

Challenging Outlook For Rentals

Analyst Jerry Revich noted that while most of the players had aggressively expanded their fleets in response to the robust industry rental demand witnessed in 2010-2014, demand had slowed, while excess supply had shifted the focus from pricing to market share.

United Rentals grew its fleet organically by 40 percent off the 2010 trough. Revich expects fleet growth to flatten in the back half of 2016 and to potentially turn negative in 2017, with the softening of the demand growth and deterioration in investment returns.

While the overhang from excess energy supply had largely been removed by improved industry utilization in 1Q, competition was intensifying. United Rentals’ largest competitor Sunbelt Rentals has plans of expanding its US footprint by increasing its fleet with an investment of $750 million this year.

“We see a challenged path for rental yields to turn positive in the medium term due to high returns on incremental equipment capex, rising competitive intensity, and improved competitor balance sheets,” the analyst wrote.