Morgan Stanley Downgrades United Rentals, Lowers Target To $81

Although United Rentals, Inc. URI shares have outperformed over the past six months, Morgan Stanley’s Mili Pothiwala believes this outperformance is unlikely to persist, given the growing softness in the non-residential market and intensifying competition.

Pothiwala downgraded the rating on the company to Equal Weight, while lowering the price target from $85 to $81.

Outperformance Unsustainable

United Rentals’ shares have appreciated 35 percent since the end of April, with the outperformance being driven by various factors such as the company’s leverage cycle.

However, the analyst believes that “this period of outperformance is over, as the outlook for Non-Resi has weakened and competitive pressures in the rental industry intensify.”

Given the current environment of flattish overall growth for United Rental, Pothiwala does not expect either positive earnings revisions or further multiple expansion.

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“We agree that the outlook for Non-Resi has softened YTD; the macro data has been choppy since earlier this year. However a cross section of the main Non-Resi indicators we track have become uniformly weaker over the past 1–2 months,” the analyst explained.

Increasing Competition

In the meantime, competition has also been intensifying in the rental industry, with comprehensive expansion plans being unveiled by Ashtead at its Analyst Day on October 13, including a 60 percent increase in branch location and a fleet increase worth $4 billion through 2021.

“This increased CapEx comes at a time when industry S/D dynamics remain challenging, and rental rate growth is still negative,” Pothiwala noted.

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