United Rentals: Equipment Rental Demand Remains Solid, Supporting Sales Growth

United Rentals URI reported solid third-quarter results, thanks to continued strength in the equipment rental market. As a result, we raised our fair value estimate by over 3% to $452 (from $437 previously). We attribute roughly half of the fair value increase to stronger than expected near-term sales, with the balance from the time value of money since our last update.

Turning to the quarter, rental revenue increased to $3.2 billion, up 18% year on year. Sales of used equipment continued to run at elevated levels, growing 102% year on year (second quarter in a row reaching triple-digit sales growth). That said, greater used fleet sales resulted in lower gross margins in the third quarter, declining 240 basis points to 41.9%. This is due to used fleet sales carrying a lower gross margin profile than rental revenue. Overall, the industry has increased fleet dispositions in response to OEM shipments normalizing.

Fleet productivity worked against the company in the quarter, declining roughly 2% year on year. This measure accounts for the impact of rental rates, time utilization and product mix.

The stock has experienced downward volatility over the past month, but the rental demand environment remains healthy. This backdrop gives us support to forecast 22% sales growth in 2023. Notably, our estimate eclipses the nearly 20% sales growth posted in 2022. However, we think lower-margin used fleet sales will result in operating margins contracting by over 40 basis points to 27.3% in 2023.

Looking further out, we remain positive on United Rentals’ ability to benefit from increasing rental penetration. We believe contractors have started to realize the economic benefits of renting intermittently used equipment. This is what gives us confidence to project 7% sales growth in our five-year explicit forecast. We believe rental penetration among contractors will steadily increase over the next handful of years.