United Rentals Could Be In Position For An Extended Upturn

Argus believes United Rentals, Inc. URI is poised for a longer-than-typical upturn and views the recent period of flat revenue as temporary.

Investors may think that United Rentals nearing the top of its business cycle as it has seen strong growth over the past five years. But, management has noted strong business activity in its core U.S. markets, and recently cited an IHS Markit forecast calling for 5 percent annual growth in the U.S. construction sector from 2016 through 2019.

"Based on this positive outlook, we think that URI shares are attractively valued at 8.7-times our 2017 EPS forecast, below the peer average of 16.6 and the Industrial sector average of 17.1," analyst Stephen Biggar wrote in a note.

In addition, the company's recent online service that fully automates the equipment rental process, allowing renters to select, order, confirm and pay for equipment should aid sales momentum.

The analyst expects 2016 sales to be hurt by slightly lower rental rates and challenging market conditions in Canada, but to benefit from a small upturn in rental volume. However, in 2017, Biggar expects URI to benefit from more favorable pricing, a continued modest increase in rental volume, and a further decline in interest expense.

"We are setting a 2016 adjusted EPS forecast of $8.50, up 6.0% from 2015, and a 2017 estimate of $9.00, implying 5.9% growth next year," Biggar noted.

Biggar initiated coverage of the stock with a Buy rating and a target price of $90, which implies a total potential return of 14 percent from current levels.

URI shares have outperformed over the past quarter, rising 4.6 percent, compared to a 2.4 percent gain for the S&P 500. The shares have also outperformed over the past year, with a gain of 19.4 percent, versus an 11.7 percent advance for the index.