What Makes United Rentals Attractive?

Scott Pope: As industrial and construction companies pursue asset-light business models, they have increasingly relied on rental companies to provide the critical equipment they need. One company, United Rentals, has emerged as a clear leader in the equipment rental industry with a 13% share of the growing $55 billion North American market. We believe that it is poised to expand its capabilities, market share, and pricing power to further extend its lead over rivals. United Rentals is currently a 4-star-rated stock trading 25% below our fair value estimate of $185, which equates to 11 times our 2019 EPS estimate.

Since United Rentals became a publicly traded company in 1997, its revenue has grown 16-fold. A sizable component of this growth has been realized through M&A activity, including $8 billion worth of acquisitions in the past decade. The fragmentation of the equipment rental market represents a significant opportunity for United Rentals and its acquisition-heavy business model. The top three rental companies only control 23% of North American market. Much of the remainder is served by smaller, less sophisticated companies focused on local business. We believe that customers will ultimately be better served by a national firm such as United Rentals with advanced customer-facing technology, a large catalog, and superior logistics capabilities.

Core to our investment thesis is our belief that the firm will garner revenue synergies through a reduction of competition in certain markets combined with expansion of specialty equipment with lower price transparency than its traditional fleet. That said, our current fair value estimate only incorporates a 1% long-term increase in operating margin. We believe these advantages and potential margin improvements are largely underappreciated by the investment community. Therefore, we believe United Rentals’ current trading price is an attractive entry point for investors seeking a long-term investment opportunity.