United Rentals Results Don't Bode Well for Equipment Manufacturers

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The recent results of United Rentals (NYSE: URI) don’t bode well for the results of equipment manufactures such as Terex (NYSE: TEX) or Manitowoc (NYSE: MTW).

United Rentals claims the largest equipment rental company in the world, operating 824 rental locations in North America.

The company reported results that again smashed estimates, sending the stock soaring 10% higher for the initial day of trading after the report. The limited revenue growth doesn’t bode as well for the equipment manufacturers.

Reviewing the results

United Rentals reported adjusted earnings of $1.12 that beat estimates by $0.11 and easily smashed the earnings of $0.66 last year. After reviewing the history, the company tends to beat earnings estimates in this range over the last year, so maybe the ‘surprise’ isn’t that big of a shock to investors that follow this stock.

The company only reported pro-forma rental revenue gains of 4.7% and 6.2% on owned equipment based on a mix of volume increases and rate hikes. Note that some media outlets are reporting 20% revenue growth, but those numbers come from the additional revenue due to the purchase of RSC back during Q2 last year.

United achieved record time utilization of 67.9% and expects to reach 68% for the year. Based on the utilization records, the full year adjusted EBITDA should reach $2.3 billion. At a market value of only $5.3 billion, the stock trades at an interesting multiple to EBITDA.

Fleet size

More important for equipment manufacturers such as Terex and Manitowoc are the sizes of the fleet. The company spent $730 million on fleet purchases in Q2 to reach a fleet size of $7.70 billion at June 30 from $7.23 billion on December 31, 2012. The age of the fleet dropped to 44.5 months from 47.2 months back on December 31.

The recent jump in fleet size, which has reduced the fleet age combined with limited revenue growth doesn’t suggest fleet size will increase much in the future. The time utilization level does elicit some requirements for increasing fleet size, but all signs exist that United is more efficient and focused on profits to allow that number to force equipment purchases.

Valuation

Anybody following Terex knows that the company recently warned, primarily due to weakness in Europe and international locations. North America has been an area of strength, and the lackluster revenue results for United Rentals suggests the area of strength might not last. Remember that United is squeezing more profits out of limited growth, meaning the company might also be obtaining favorable pricing from equipment manufacturers such as Terex.

After the warning on earnings, analysts have slashed earnings for 2013 to below $2 and close to year ago earnings. The forecast is still for $3 in 2014, which would make the stock appealing at these levels, but no indications exists that a global rebound in equipment will take place to justify earnings jumping 50%.

Manitowoc as well trades at a compelling forward multiple, but investors have to assume a significant jump in earnings in 2014. The current expectations are for more than a 100% jump from 2012 to 2014, which doesn’t appear plausible based on the global economy for equipment. The stock trades only a dollar off 52-week highs, suggesting the inability to reach the significant earnings growth would send the stock lower.

Bottom line

While Terex gained 3.5% on the day and Manitowoc saw minor gains following the upbeat results from United Rentals, those numbers don’t suggest improved results from the prior two. If anything it backs up the claimed slowdown in North America from Terex. Not to mention both Terex and Manitowoc are global manufactures as dependent on European, Asian, and Middle Eastern growth as the U.S. If investors like the United Rentals results, that stock should be bought in place of manufacturers already struggling from the global slowdown.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool owns shares of Terex. 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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