BofA Just Downgraded United Rentals, But Why?

In a report published Friday, Bank of America Merrill Lynch analyst Ross Gilardi downgraded the rating on United Rentals, Inc. (NYSE: URI) to Underperform, while reducing the price target to $80. The company's pricing power is gradually declining due to the falling crude prices and the slowdown in the U.S. economy.

"Recent data points suggest a growing lack of pricing power for URI, a sign of emerging oversupply in the rental fleet," Gilardi said, while adding, "A lack of upward price movement in May following a flat April and negative Q115 creates high risk of a more substantial negative guidance revision in coming months."

Given that rental companies are slowly losing pricing power, the analyst believes that the next natural step for these companies would be to make cuts in capital spending, while it works on rebalancing its fleet. Some of the company's peers have already starting doing this, and United Rental is likely to follow suit.

"This gives us greater conviction in our call that the aerial work platform cycle has peaked," Gilardi added. The 2015-16 EBITDA and EPS estimates have accordingly been lowered.