Rent for Your Portfolio
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While Google tumbled, some stocks were quietly going about their business. One stock which was unlikely to appear on many peoples' radars is United Rentals (NYSE: URI). In the early part of the year the stock was regularly pushing new 52-week highs, ultimately peaking near $48. The rally followed a period of heavy losses in the first half of 2011. But things turned sour for the stock when it completed a $2.5 billion cash and stock deal for RSC Holdings which resulted in a reported loss for the company. Since the deal the stock slipped, and it has spent most of the summer and early fall trading two dollars either side of $34. But a buying surge, where 12.5 million shares changed hands, altered this dynamic. The stock has managed to gather a bit of a tailwind as a result, and its 16% short interest will no doubt leave some worried.
The cause for the recent stock surge was a significant earnings beat, helped by an improving housing market. The company supplies equipment to the construction sector, in addition to other sectors. Improving economic conditions have raised Utilization rates, which have steadily increased for each month from July through to October. Analysts are optimistic going forward, with over 20% revenue growth expected for FY2013. Since the earnings miss in Q1 FY2011, the company has come in ahead of analyst estimates, coming in with a positive earnings per share for each subsequent quarter. For the last quarter it reported earnings of $1.35 a share, ahead of $1.11 estimates. The next two quarters are its seasonal weak period, with estimates shy of $1 a share for Q4.
Concerns are voiced on its debt load - it's $7.43 billion total debt is effectively double its market cap. However, the S&P in September has raised the company's credit rating, on improved "operating performance and credit measures." In addition, United Rentals recently announced a $400 million principal amount offering of senior notes due in 2023, to redeem against senior notes due in 2016. Going forward, the company is planning a "robust delevering over the next year" to improve free cash flow, which currently sits at a loss of $20 million a year. If it doesn't improve its free cash flow it will find it increasingly harder to service its debt.
United Rentals a tricky company to place relative to its peers. In the Construction sector, USG Corp (NYSE: USG) has shown itself to be a consistent performer throughout 2012. As with United Rentals, it was able to surge on nearly double regular volume as the stock cleared $24. The stock spent the best part of the last 4 years trading below $26, but this looks ready to change, and it has attracted no shortage in buyers. Unlike United Rentals, the positive reaction in the stock's price was attributed to narrowing losses. For its most recent quarter, it came it at a 29 cent per share loss, worse than what analysts had expected, but well ahead of the comparable quarter last year and its -$1.09 loss. USG Corporation's main drywall business has benefited from overall improvements in the construction sector, but also in the 33% and 10% growth (from 2011) of heavy-drywall using lodging and office space construction sectors. Where concerns lie is in its history. The company emerged from Chapter 11 reorganization in 2006 after asbestos claims sent it into . This has probably left some investors sceptical going forward, particularly in the absence of a profitable quarter.
As a Rental company, United Rentals is closest to Hertz Global Holdings (NYSE: HTZ). In addition to the Car Rental sector, Hertz is also involved in the rental of vehicles for the construction sector. Although its current focus is its attempt to acquire Dollar Thrifty. The company has a history of coming in slightly ahead of analyst expectations, and is due to report on its seasonally strongest Q3 quarter on October 30. In its last earnings call, Hertz reported an "outstanding quarter" for its Advantage Discount Brand, with revenues up 42% for the quarter and an impressive 31% gain in same-store sales. But it also saw strong growth in its Equipment Rental business, where it competes directly against United Rentals. Here revenues were up nearly 19% for Q2, helped by a pricing rise. This division was also performing "at or even a bit above plan" and this was not expected to change, with rental acquisitions "exceeding" internal plans. Hertz also has plans to develop fixed-term equipment leasing solutions for its construction and industrial clients, a significant benefit in a tight credit environment for a struggling sector.
In a side-by-side comparison, Hertz and United Rentals have comparable current P/Es around 22. Hertz has a projected P/E of 9.2 for fiscal year end of 2013, and United has a more aggressive forward P/E of 8.1. USG Corporation hasn't turned a profit and projections for P/E are in the 50s, but it will need to start making money soon if it's to reach that. Hertz has the strongest ROE at 12.7% to United Rentals' 8.1%. All three companies are benefitting from the improvements in the construction sector. United Rentals is best placed to take advantage, given USG Corporation hasn't turned a profit and Hertz has a stronger focus outside of its Equipment Rental business. But it looks like there is a ray of sunshine peaking through for this downtrodden sector.
fallond has no positions in the stocks mentioned above. The Motley Fool owns shares of Hertz Global Holdings. 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.If you have questions about this post or the Fool’s blog network, click here for information.