Citi Adds United Rentals To Focus List Amid Machinery Stock Rally

Citi has added United Rentals, Inc. URI to its U.S. Focus List as it sees a number of catalysts driving the stock higher. The addition comes amid a sharp rally in machinery stocks (and risk assets more broadly), which has led to increased questions from investors about the overall sustainability.

"Recent industry/company data points suggest ongoing rental capex restraint, which combined with easing Industrial headwinds, should help to drive yr/yr rate growth (and earnings acceleration) by 4Q16," analyst Timothy Thein wrote in a note to clients.

Related Link: RBC Met with United Rentals Management: Here's What Happened

The stock has traded closely with oil since late '14, and Citi remains bullish oil prices relative to the forward curve, with its year-end forecast about 30 percent above current December contracts.

Meanwhile, Citi's Quant team expects smaller cap, higher beta value names to outperform near-term, which provides further support to our positive call on URI.

Tailwinds

The stock offers compelling leverage to cyclical, secular (strength in non-residential US construction) and company-specific tailwinds.

"We recognize the risk that lower Energy spending could have greater negative repercussions than what is currently assumed, but believe at current prices investors are more than adequately compensated, especially given robust FCF generation and a shift towards renting," Thein noted.

Thein has a Buy rating on United Rentals stock, which closed Friday's regular trading session at $57.49. The stock has dropped 21 percent this year.