Three Rental Companies to Consider for 2013

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A quick look at several rental firms, including two catering primarily to consumers, revealed attractive investments for the coming year or as long-term holdings. Each is expanding its location count, supporting rising revenues. The stocks are priced at valuations that could make them above-average performers.

United Rentals (NYSE: URI)

The largest equipment company in the world with nearly 850 locations, URI’s fleet is valued at about $7.4 billion. It added to this asset base this past April with the acquisition of RSC Holdings, an operator of 440 locations. URI’s customer contingency of industrial, construction, manufacturing, utility homeowner, and government entities could well be poised for increased spending in 2013, given upturns in such end markets.

Thus, having almost doubled its presence across the U.S. and Canada, profits are on tap to soar, as seen in the September quarter, when share earnings climbed more than 100% sequentially, excluding a restructuring charge. On that note, further related costs should be significantly lower. The downside to the company is its massive debt balance and weak liquidity position (as measured by its negative current ratio). Finally, though, rental rates are ascending and volumes are apt to increase on a shift from ownership to renting. Thus, the shares are worth considering at this juncture.

Aaron’s (NYSE: AAN)

Aaron’s is a specialty retailer offering the sale and lease ownership of residential furniture, electronics, computers, appliances, and accessories. The company’s leasing business is growing by way of new store openings and same-store leasing revenue gains. Leases contribute the bulk of net sales and strong demand has resulted from the gaining of share from traditional furniture retailers thanks to its lower cost.

Earnings likely advanced substantially in 2012, behind the aforementioned factors. As opposed to URI, the balance sheet is strong, and this will possibly allow Aaron’s to further expand its location count at a steady pace. The stock, taken from my watchlist, has upside potential exceeding market averages at its currently subdued valuation.

Rent-A-Center (NASDAQ: RCII)

This company, dating back to 1986, is similar to Aaron’s, operating a rent-to-own service for the same types of merchandise as AAN. Having saturated the market with 3,400 units, RCII is now expanding through kiosks within traditional retail stores and on an international basis. It added about 200 kiosks during 2012. The primary non-U.S. market it is targeting is Mexico, where it built about 40 units in 2012.

Revenues are climbing at a modest pace, helping to boost profits. Plus, the company is utilizing cash wisely: It is repurchasing shares, has lifted the dividend, and is paying down debt. Overall, with the kiosk (RAC Acceptance) business offsetting a slowing and aged core operation, sales growth may well persist. Its sound strategy ought to benefit investors, too. The shares have appeal at their recent price.

Summary

The rental market has apparently gained acceptance of late because of consumers’ lack of discretionary income to spend. The trend seems as if it will continue for now and investors should take note. These three issues, URI, AAN, and RCII are rated 3, 2, and 4 by the CAPS Community, respectively.


dctotal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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