Something Puzzling About United Rentals' Q1 Has UBS Scratching Its Head

Analysts at UBS found something puzzling about United Rentals, Inc. URI's earnings report: Why was utilization in the quarter strong at a time when rates were weak? The puzzling trend may contribute in some way to the stock's more than 5 percent decline Thursday morning. UBS's analyst Steven Fisher pointed out in a research report that United Rentals' rental rate fell 1.4 percent on a year-over-year basis and fell 0.4 percent sequentially but time utilization was higher by 1.9 percent year-over-year. The analyst noted that United Rentals' management said that utilization was a positive surprise and due to stronger than expected demand. However, weakness in the Canadian market, an unexpectedly negative seasonal mix, and slower absorption of equipment drove rates below expectations.

2 Debates For 2017

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Fisher added that the last time the company posted a similar increase in time utilization was back in the first quarter of 2012 when it rose 2.0 percent while rates rose 7.3 percent year-over-year at the same time.

Looking forward to the rest of the year, Fisher argued there will be two main debates playing out: 1) was a stronger demand seen in the quarter a "pull-forward" due to favorable weather or did the market improve, and 2) was the slow absorption due to seasonal factors or signs of heightened competition.

The analyst believes that there is "some risk" that the first quarter benefited fro "pull-forward" demand which could result in a "less pronounced" outlook.

Also of note, Fisher highlighted the strong first quarter volume growth wasn't accompanied with a raise in its base business capex guidance. This could imply "some caution on their part."

Bottom line, the analyst suggested that investors will be on the lookout for any indication that rates will turn positive in the second quarter and any positive commentary on oil and gas demand will also serve as positives. On the other hand, expectations for ongoing negative rates could weigh on the stock unfavorably.

Shares remain Neutral rated with an unchanged $121 price target.

At time of publication, shares of United Rentals were down 5.19 percent at $113.25.