We Think United Rentals Will Benefit From Solid Demand Prospects in the Long Term

Equity Analyst

Dawit Woldemariam

Revenue segments as reported by the company.

Equipment rentals

Sales of rental equipment

Sales of new equipment

Contractor supplies sales

Service and other revenues

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An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

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Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

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Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

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We think United Rentals will continue to be the top player in the equipment rental industry. As the industry leader, the company provides customers with better equipment availability and reliability than smaller players. However, many of the equipment brands found in United Rentals’ product catalog can also be found with competitors, such as Sunbelt Rentals (owned by Ashtead), Herc, and thousands of other rental companies across North America. 

United Rentals has employed an aggressive strategy of mergers and acquisitions, completing hundreds of acquisitions over the past two decades. We expect the company to continue rolling smaller rental companies into its rental platform, further expanding its geographical reach and fleet categories. We think the equipment rental industry is ripe for consolidation, and we believe United Rentals will benefit, but so will its competitors. The company will likely be competing with other players looking to build scale. United Rentals operates approximately 1,400 rental locations throughout North America, significantly more than the next-largest player, Sunbelt, which operates over 900 in the region. United is also increasingly extending into specialty equipment (29% of sales), which includes trench safety, power and HVAC, and fluid solutions. 

The company has exposure to end markets with attractive near-term tailwinds. We think the construction and industrial markets will remain resilient, despite coming off a strong period. We believe the total addressable market for the equipment rental industry will continue to expand as rental penetration increases. More and more contractors are electing to rent general equipment (aerial lifts, forklifts, generators) that are intermittently used on projects. This allows them to save on project costs.

Business Strategy & Outlook

We don’t think United Rentals benefits from an economic moat, despite being the largest rental company globally. In our view, the most likely moat source would be scale-driven cost advantages over smaller competitors. Larger players typically offer customers with greater equipment availability and reliability than regional operators, but we don’t see any established barriers preventing other rental companies from following the same strategy as United Rentals. Over the past decade, the company has acquired smaller players, a playbook that others can easily replicate, eventually leading to similar levels of scale. For these reasons, we believe it will be difficult for United Rentals to generate excess returns over the next decade. Furthermore, we think the price-sensitive profile of customers in the rental industry prevents the company from developing pricing power. 

Even if industry consolidation starts to take hold, we think the top 10 rental companies are in a strong position to increase their market share. The rental industry is highly fragmented, presenting numerous M&A opportunities for not only the top three players, but also the top 10. Through an aggressive acquisition strategy, these players could eventually build similar scale to United Rentals. While it’s natural to think that United Rentals, Sunbelt, and Herc will be the first in line to benefit from industry consolidation, we believe it’s also reasonable to assume that significant-size rental companies have a relatively strong chance at outbidding the top three players when smaller companies come up for sale. In some cases, M&A opportunities may not rise to the top three players’ attention, particularly in local markets where they don’t have a strong presence. 

Rental companies face numerous competitive forces, which we believe prevents the formation of cost advantages and intangible asset moat sources. United Rentals is just one of the hundreds, if not thousands, of other players in the rental industry that customers can choose to rent from. The industry ranges from small and local rental companies to national players like Sunbelt Rentals, which possesses approximately 13% market share in North America compared with United Rentals’ 17% and Herc’s 4%. In addition, customers can rent equipment from large retail stores such as Home Depot and Lowe’s and heavy equipment dealers. Together, we believe these competitive forces make it difficult for United Rentals and Herc to develop durable competitive advantages. From a cost advantage perspective, as illustrated earlier, both players will likely compete with the other rental companies on the M&A front, which may limit their ability to develop economies of scale. Additionally, we think both companies will need to improve their respective cost structures by reducing the costs associated with their branch networks and equipment sourcing strategies. With respect to intangible assets, we believe rental companies are closer to price takers than price makers. Customers choose to rent to keep project costs as low as possible, meaning that rental companies have little room to raise rental prices and drive higher capital returns.

In our view, the rental companies have not built up enough of an economic cushion to weather future economic downturns. While United Rentals has normally outearned its cost of capital over the past decade, we are not comfortable enough to award the company an economic moat given the cyclical nature of the end markets it serves. Adjusted returns on invested capital have typically ranged from the low double digits to midteens over the past decade. Moatworthy companies under our coverage in the heavy equipment industry possess stronger returns on invested capital, which we forecast to be well over 20% on average compared with the midteens we forecast for United Rentals. While we are encouraged by the rental companies’ ability to pull back on capital expenditures during slower economic periods to preserve free cash flow, the cyclical nature of industrial and construction markets can lead to prolonged periods of muted sales growth and lower returns on invested capital. 

We do not think United Rentals faces any substantial threats from environmental, social, and governance risks. As a rental company, the firm does not have the same level of exposure to the product safety issues, carbon emissions, and environmental regulation that original equipment manufacturers face. Rental companies’ equipment can be used multiple times by different customers, reducing the need for new equipment to be manufactured, eliminating emissions that would have been produced through manufacturing operations. We expect this to continue in the future as rental penetration proliferates in the medium term. Looking inward, rental companies are aiming to reduce their own carbon emissions, from the energy use in branch locations to their own transportation services (moving rental equipment between branches). Additionally, rental companies have an opportunity to help their customers track the emissions of rental equipment to meet reporting requirements.

None

Economic Moat

United Rentals

United Rentals, Inc. engages in the equipment rental business. It operates through the General Rentals and Specialty segments. The General Rentals segment includes the rental of construction, aerial and industrial equipment, general tools and light equipment, and related services and activities. The Specialty segment focuses on the rental of specialty construction products such as trench safety equipment, power and HVAC equipment, fluid solutions equipment, mobile storage equipment and modular office space. The company was founded by Bradley S. Jacobs in 1997 and is headquartered in Stamford, CT.

Earnings data Q2 2021

Earnings data Q3 2021

Earnings data Q4 2021

Earnings data Q1 2022

Earnings data Q2 2022

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Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

Earnings data Q2 2024

United Rentals reports record Q1 revenue and EBITDA growth

United Rentals had a strong Q1 2023, with robust revenue and EBITDA growth, despite challenges related to recent acquisitions. The company remains confident in its ability to capitalize on industry tailwinds and is committed to driving higher margins and returns over time.

United Rentals reports strong Q2 performance and eyes growth opportunities

United Rentals' Q2 2023 earnings call showcased robust financial performance, a positive outlook for margins, and opportunities for growth through potential M&A and infrastructure spending. While facing challenges related to industry CapEx and managing inflation, the company remains optimistic about its ability to outpace overall industry growth and manage through any changes.

United Rentals reports record Q3 revenue and reaffirms 2023 guidance

United Rentals delivered strong Q3 results, with record-setting revenue and adjusted EBITDA. The company remains confident in its guidance for 2023 and the outlook for 2024, while also focusing on fleet refreshment and capitalizing on potential M&A opportunities. Despite challenges related to replacement CapEx and the timing of revenue synergies from acquisitions, United Rentals is well-positioned to capitalize on industry indicators and customer confidence.

United Rentals reports record Q4 earnings and anticipates strong 2024 growth

URI's Q4 2023 performance reflects robust revenue and earnings growth, positioning the company for continued success in 2024. Despite potential tax implications and equipment recovery rate normalization, URI remains focused on driving shareholder value and expects another record year. The company's strong growth visibility and focus on long-term investments present promising opportunities for the future.

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United Rentals, Inc. engages in the equipment rental business. It operates through the General Rentals and Specialty segments. The General Rentals segment includes the rental of construction, aerial and industrial equipment, general tools and light equipment, and related services and activities. The Specialty segment focuses on the rental of specialty construction products such as trench safety equipment, power and HVAC equipment, fluid solutions equipment, mobile storage equipment, and modular office space. The company was founded by Bradley S. Jacobs in 1997 and is headquartered in Stamford, CT.

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News for United Rentals Stock (URI)