United Rentals Earnings: Shares Fairly Valued After Recent Rise

United Rentals URI posted solid second-quarter results, including sales growth of 28% year over year and over 20 basis points of operating margin expansion. We raised our fair value estimate to $437 per share from $424 following the earnings release. The change is due to our stronger near-term sales and margin expectations following management’s raised guidance. The shares are now fairly valued, in our view. While the stock has experienced both upward and downward volatility year to date, the rental demand environment remains healthy. This is what gives us confidence to project over 21% sales growth in 2023, slightly above what United Rentals posted a year ago. We think strong demand will allow the company to maintain strong pricing and boost 2023 operating margin by 60 basis points to 28.4%.

United Rentals has benefited from the supply constraints that have held back production of new construction equipment. More construction contractors have turned to the rental channel to find equipment. As supply chain issues ease, we expect some of that business to go back to the new equipment channel. However, contractors have started to realize the economic benefits of renting intermittently used equipment. Our forecast for United Rentals is underpinned by this trend. We believe the proportion of contractors renting equipment will steadily increase over the next handful of years.

That said, we still view equipment rental as a no-moat industry. The magnitude of returns on invested capital is a point of concern for us: There isn’t much of a cushion to protect returns from falling below the cost of capital in a protracted downturn. This prevents us from assigning United Rentals and its peers a moat. The key to watch going forward is United Rentals’ appetite for acquisitions. By consolidating the fragmented rental industry, the company could build economies of scale in its business.