This “URI Stock Forecast: A Stellar Compounder” article was written by Rafi Rees – Financial Analyst at I Know First.

Highlights

• URI recently announced that they will be returning excess cash as a dividend to shareholders.
• Management maintains that this does not come at the expense of growth prospects which remain incredibly strong.
• Share buybacks are expected to pick back up with $1bn worth of repurchases scheduled for 2023 amounting to ~2mn shares or 3% of shares outstanding.

Company Overview

United Rentals (URI) is a publicly traded equipment rental company based in the United States. The company was founded in 1997 and is headquartered in Stamford, Connecticut. URI provides a wide range of equipment for rent, including aerial work platforms, earthmoving equipment, material handling equipment, power and HVAC solutions, pumps, and tools. The company serves a variety of industries, including construction, industrial, and government customers. URI operates a network of more than 1,000 rental locations across the United States and Canada. The company also offers online and mobile rental capabilities through its e-commerce platform, allowing customers to reserve equipment and manage their rentals from anywhere, at any time. In addition to equipment rental, United Rentals offers a range of services, including equipment delivery and pickup, equipment maintenance and service, and safety training for customers.

Growth Strategy

United Rentals has demonstrated a strong track record of growth, and the company has set its sights on continued expansion in the coming years. The company has stated that they expect to continue growing in the double digits, which is an impressive feat given that the broader market is only projected to grow at about 4-6%. One factor that has enabled URI to maintain its impressive growth trajectory is its market position. They are the leading player in the equipment rental industry holding 16% of the market share, up from 13% in 2019. With over 1,000 rental locations across the United States and Canada, the company has a significant advantage over its competitors. Having such a robust network means that there is essentially a branch in every metro. This means that the growth strategy is no longer focused solely on building out the network, rather it is focused on increasing the density of customers at these branches.

Looking ahead, United Rentals plans to continue its growth trajectory by expanding its specialty sector and opening new rental locations. The company has identified specialty rentals, such as power and HVAC solutions, as a key area for growth. By continuing to invest in this area, United Rentals aims to solidify its position as a leading provider of rental equipment and services. One of the key advantages that United Rentals has is its robust free cash flow, which enables the company to invest in growth initiatives and pursue strategic acquisitions that its competitors cannot match. Players in the industry who are going through a tough time will be a target for an acquisition. URI has historically used M&A as a growth strategy and they continue to do so with the recent acquisition of Ahern for $2bn that was completed in December of last year.  As a result, United Rentals is in a unique position to grow at a faster rate than the industry by rolling up competitors and continuing to dominate market share.

Shareholder Value and Catalysts

With a significant surplus of cash, United Rentals has initiated a highly favorable shareholder-oriented approach, focused on returning excess funds to its investors. In the space of 7 years, URI has reduced the total shares outstanding from 95 to 71 million.

During the most recent earnings call, URI’s management revealed that the company plans to allocate $1 billion in cash for the purpose of buying back additional shares in 2023. At current market prices, this amount equates to around 2 million shares being removed from the market. As a result, shareholders of United Rentals need not be concerned about dilution, as the company is taking measures to reduce the number of outstanding shares. This reduction in the number of shares available is expected to drive the share price higher, as each remaining shareholder will own a higher percentage of the overall business.

United Rentals also announced a new quarterly dividend program, which is expected to provide an initial yield of 1.5%, or $5.92 per share. The management team has further stated their intention to increase the dividend payout over time, which is a positive indication of the strength and expected durability of the business. This move to initiate a dividend program could potentially act as a catalyst for the stock, as it may expand the universe of potential investors. The addition of a dividend may appeal to many dividend investors and ETFs who typically favor companies that pay dividends, thereby increasing demand for shares.

Regarding capital allocation, management had the following to say in the most recent earnings call – “these two programs combined should return approximately $1.4 billion to our shareholders this year or about $20 per share at the same time that we continue to see substantial growth in our earnings. When you look at the past two years and the kind of growth we drove, including significant M&A, we still have the capacity and free cash flow to give a dividend. So we had been asked the question by someone earlier, are you giving a dividend because of less growth prospects? No, quite contrary, it’s because even after supporting growth, we have excess cash to return and that points to the resiliency of our strong free cash flow through the cycle.”

Valuation

As a value-oriented investor, it is important to consider the valuation of the company when making an investment decision. There are some fantastic companies out there that do not make great investments due to the nature of the price in relation to the valuation. It is important to remember that numbers can give you a false sense of security and valuation is just as much an art as it is a science. The output is sensitive to the inputs and assumptions you feed it and given no one knows the future, you are bound to be wrong. Therefore, my goal with a DCF is to be slightly less wrong than the market and use the calculated value as a guide not gospel when considering whether to invest.

The DCF I built for URI can be seen in the figure below and arrives at a final value per share of $555 which produces an upside of 22%.

I have assumed double digital revenue growth until 2028 at which point the revenue growth drops off and moves toward the terminal growth rate. Management stated that EBIT margins are also expected to expand, so these grow into the 5^th year at which point they plateau. This paints a very positive picture for URI with some further upside potential for the company.

Another way to think about valuation for those who believe that share price follows EPS is to think about where earnings will move next year and then apply a P/E multiple on that value to give us a target price for 2023. We can use management’s projected financial outlook for that year, which is typically conservative. Using the lower end of the projected range, we can assume a revenue of $13.7 billion, representing an 18% growth from the previous year. Assuming an operating income of $4.2 billion, (a 30% operating margin), we can estimate a net income of approximately $2.75 billion (a 20% net margin). If we divide this by the expected number of shares at the end of 2023 (69 million, after accounting for 2 million shares bought back), we arrive at an estimated EPS of $40. To calculate a target share price, we can apply a P/E ratio of 15 to the estimated EPS of $40. This gives us a target share price of $600, which represents a 32% upside from the current price.

Conclusion

Buffett is credited with saying “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price”. This quote is particularly applicable to URI, as it possesses all the characteristics of a superior company with a shareholder-friendly management team. It is the kind of business that can generate significant long-term returns, allowing investors to purchase it, hold it, and check back in a decade. URI is a company that can leverage its economies of scale to capture market share and maintain a growth rate that exceeds that of the broader market. For those looking to make a quick multi-bagger, this may not be the ideal choice. However, for those of us content to get rich slow through steady, long-term growth, this would be a good place to start.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with URI Stock Forecast

I Know First has been bullish on the URI stock forecast in the past. I Know First analyst published a premium article on April 25^th, 2022 about the great URI’s stock potential in the coming year. Despite that the prediction one year horizon is not over yet, we can notice a significant current return of some 49.57% that an investor could have If he bought URI’s stock according to the analyst’s advice.

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Please note-for trading decisions use the most recent forecast.