United Rentals, Inc.: Earnings About To Jump

Price:$43.75;Forward P/E:9.91;Earnings Growth:86.6%;Projected Sales Growth:16.3%;Market Cap:$2.79 billion

Why It's Featured: New acquisition will bump sales and earnings.
Danger Zones: Highly, highly leveraged....did I mention highly leveraged.

United Rentals, Inc., (URI-NYSE) through its subsidiaries, operates as an equipment rental company.  It offers approximately 3,000 classes of equipment for rent to customers comprising construction and industrial companies, manufacturers, utilities, municipalities, homeowners, and government entities.

The company's fleet of rental equipment includes general construction and industrial equipment, such as backhoes, skid-steer loaders, forklifts, earthmoving equipment, and material handling equipment; aerial work platforms consisting of boom lifts and scissor lifts; and general tools and light equipment, including pressure washers, water pumps, generators, heaters, and power tools.

Its offerings also include trench safety equipment, such as trench shields, aluminum hydraulic shoring systems, slide rails, crossing plates, construction lasers, and line testing equipment for underground work; and power and heating, ventilating, and air conditioning (HVAC) equipment, which consists of portable diesel generators, electrical distribution equipment, and temperature control equipment, including heating and cooling equipment.

In addition, URI sells new and used equipment, as well as related contractor supplies, parts, and service; and offers repair, maintenance, and rental protection services.

Further, it develops and markets RENTALMAN, an enterprise resource planning application for equipment rental companies; and INFOMANAGER, which offers solution for creating a business intelligence system.

As of January 1, 2012, the company had an integrated network of 529 rental locations in the United States and Canada.  United Rentals, Inc. was founded in 1997 and is headquartered in Greenwich, Connecticut.

Here's the headline: Earnings are estimated at $3.45 this year, up from $1.87 last year.  Next year, 11 analysts have a consensus of $4.41 a share.  There's a reason for the big improvement.

URI is in the process of buying RSC Holdings for about $4.5 billion, consisting of $1.1 billion in stock (about 29 million shares), $1.1 billion in cash, and the assumption of $2.9 billion of debt.  In preparation for the closing, URI issued $2.8 billion in notes.  When the deal is done, the remainder of the proceeds ($1.7 billion) will pay off some of RSC's debt.  Within 6 months to a year after the closing, management will buy back about $200 million worth of URI stock, around 5 million shares.

Here's what URI gets from RSC: From sledge hammers to forklifts, RSC Holdings rents it. The company, dba RSC Equipment Rental, is one of North America's largest equipment dealers. RSC rents heavy equipment and light tools to commercial construction and industrial companies in such markets as public and private infrastructure, health care, and manufacturing. RSC's offerings include 900-plus categories of equipment, from backhoes and air compressors to pumps and welders. Along with its rental activities, the company sells used and new equipment and offers related supplies and services. It operates via some 450 rental locations in about 40 states and three Canadian provinces. (Source: Hoovers)

Analysts see revenues jumping to $3.04 billion this year, up from $2.61 billion in 2011, a gain of 16.3%.  Next year, 9 analysts have a consensus estimate of $3.3 billion, another 8.6% increase.  As for the earnings, (see above), expect to see synergies from the merger to add $145 million within a few years.  Cash flow will also improve.

Perhaps the biggest reason for higher expectations is a shift in the construction markets: there's been a trend to renting equipment rather than buying as users are reluctant to spend money on large construction machinery at the beginning of a recovery, not knowing if it can be sustained.  If global economic recovery is real, expect URI to be one of the beneficiaries early. That's probably why the stock is up 15% in the last couple of weeks.  Investors are beginning to believe there will be a real recovery.

Here's the one big warning flag: Debt is 98% of capital.  The debt to equity ratio at 6684%.  Total debt is $6.02 billion (but includes the recently raised issue).  When, not if, interest rates go higher, expect this heavy load to weigh down earnings.  For the next couple of years, if the Fed can keep rates where they are, this won't be a concern.  But if the recovery gains strong momentum, the Fed can't stop rates going higher.

Essential Numbers:
- Trailing P/E: 25
- Price to sales: .99
- Price to book: 30
- Operating margin: 18.22%
- Profit margin: 4.88%
- Return on equity: 493%
- Return on assets: 5.69%
- Total cash: $26 million
- Cash per share: 41 cents
- Current ratio: .63
- Book value per share: $1.41
- Beta: 2.71
- 52-week change: 59.13%
- Shares Outstanding: 63.77 million
- Float: 59.64 million
- Held by insiders: 7.63%
- Held by institutions: 100%+
- There is no dividend.

There's risk in this stock with all that debt.  But there's also plenty of upside potential as global economies revive.  If that continues, expect URI to show even better numbers than analysts already estimate.

- Company Web site: www.ur.com

- Ted Allrich
May 10, 2012