United Rentals

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

United Rentals is the world’s largest equipment rental company, providing a wide range of equipment for construction, industrial, and commercial customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

United Rentals (URI) operates primarily in the United States and Canada, with additional operations in a number of other countries including Mexico and some in Europe. The company’s business revolves around renting equipment to customers, rather than selling it, generating revenue from rental fees. They have an enormous fleet of equipment, with a wide range of models and types.

Revenue Distribution: URI’s revenues are primarily derived from rentals, with equipment rental revenue accounting for the vast majority, and additional revenue from service and other fees from related services (delivery, etc). They report results in two segments: general rentals and specialty rentals. The general rentals business generates about 75% of revenue whereas specialty business generates the remaining 25%. Within each rental segment, customers can rent an item for a day, week, month, or longer.

  • General Rentals: This segment includes a broad mix of construction, industrial, and other general purpose equipment, such as earthmoving, material handling and power and HVAC systems

  • Specialty Rentals: This segment consists of specialized equipment such as trench safety, power & HVAC, and tool solutions, as well as various other specialty offerings.

    • Key Trends in the Industry:
      • Non-Residential Construction: The non-residential construction market is a key driver for URI. According to ABI, this market is expected to grow slowly through the rest of the year and into 2025.
      • Infrastructure Spending: Government infrastructure initiatives (such as the IIJA or Inflation Reduction Act) is driving strong demand for equipment.
      • Growth in Small and Mid-Sized Companies: The amount of equipment that small and mid sized companies are renting vs buying has steadily increased over the past few years.
      • Onshoring/Nearshoring: An increase in projects due to companies onshoring or nearshoring their operations is boosting demand for equipment.
      • Technology Adoption: Automation and data analytics are becoming increasingly important for construction and equipment rental companies to manage operations and fleet.
  • Margins: Rental revenue margins remain elevated, and this, combined with a pricing environment that allows for modest rate increases, should lead to better profitability. Their gross margins are 37-40%, while adjusted EBITDA margins average from 44-48% for the past few years.
  • Competitive Landscape:
    • URI faces competition from other equipment rental companies, such as Sunbelt Rentals, as well as independent equipment distributors.
    • Scale, especially the cost of having a large amount of easily accessible equipment, is key to being competitive in this market.
    • Local, smaller players are plentiful but lack the size and sophistication to compete with larger players.
    • Major companies compete mostly on geographic coverage and the availability of specialized equipment.

What Makes the Company Different: * Size and Scale: They are the largest player in the industry. * Extensive network: A large fleet, a huge branch network, and the ability to deliver large volumes of equipment. * Technological Adoption: Their focus on tech to improve customer engagement and streamline operations is giving them an advantage over competitors who have a low tech footprint.

Financials

Revenues:

  • URI’s revenues for 2023 were 13.4 billion, up 25 percent compared with 2022 and 5.5 percent organic growth. Equipment rental revenue makes up 85-90% of their total revenue. The company is seeing very strong growth in its specialty division, which currently makes up 24% of total revenues, but that growth is still coming from both divisions.
  • Profitability:
    • The full year net income was $2.04 billion in 2023, compared with $1.33 billion in 2022. This resulted in a diluted EPS of $30.72 in 2023 vs diluted EPS of 19.16 in 2022.
    • The company has shown an increase in adjusted EBITDA margins of 47.9%, which was higher than in previous years.

The importance of a large fleet and scale in rental businesses The size of their fleet and the scale of their operations allow for lower costs relative to the competition. The sheer size of their fleet and availability of inventory are key factors in maintaining profitability. A major player can more easily deliver a truck or machine in a certain part of a country or world.

  • Cash Flow: Free cash flow was $1.5 billion in 2023 compared to $1.3 billion in 2022. This growth in cash flow shows the company’s continued strong performance. * Their focus on free cash flow allows a lot of discretionary spending. They are using this for large stock buybacks as well as M&A.
  • Balance Sheet:
    • They had a debt of $16.2B at the end of 2023 compared to 14.9B the previous year. This debt increase was due to a large acquisition of Ahern, which cost $2 Billion.
    • They had cash of about $600 Million
    • Goodwill, at about 6.5B, is the second highest item on their balance sheet
    • Their leverage ratio (total debt to EBITDA) is at about 2.1 which is above their own stated goal of 2.0

Moat: 2/5

URI’s moat is rated at 2/5 because while the company does have some competitive advantages that give it a “narrow moat” rating, these advantages are not as strong and easily defensible as in a company with a “wide moat”. Here’s why:

  • Scale: URI’s largest advantage is scale. Having the largest fleet and network of stores allows URI to generate low costs, especially in the delivery of equipment, and it is difficult and expensive for competitors to replicate this. This is an advantage, but it is not impenetrable.
  • Switching Costs: Once a company has begun renting from a supplier and knows its operating procedures, etc. it becomes harder to change. This creates small switching costs that are advantageous.
  • Brand: They benefit somewhat from their brand, but the industry as a whole does not care much about brand.
  • No true proprietary product: URI sells rentals. A better process or more inventory is easy to see and copy.

Risks to the Moat

  • Economic Downturns: The company’s revenues are highly sensitive to economic downturns and construction activities. This is because their main business involves renting equipment to the construction industry and other companies. A downturn in the economy could severely limit their growth.
  • Increased Competiton: It is relatively easy for other companies to increase supply of equipment, and there is low barriers to entry in the business, meaning more companies could start and compete with them over price, which may threaten margins.
  • High Capital Expenditure: A large amount of free cash flow goes back into updating equipment. This high capital expenditure means they require continuous financial performance in order to maintain good returns.
  • Technological Disruption: Their business can be completely disrupted by a competitor who can invent a much more efficient or cheaper model.

Management Discussion

URI management has recently talked about these topics:

  • Acquisitions: They just completed a big acquisition and they are focused on paying it down with excess cash flow.
  • Growth outlook: They expect to grow revenues 12-15% in 2024, mainly from new construction and infrastructure, and they will continue to focus on deleveraging their balance sheet, while buying back shares.
  • Capital Allocation: They will prioritize buybacks of stock and debt repayment over acquisitions for the next few years.
  • Debt: They expect the leverage ratio to come back down to ~1.7 over the next few years.

Understandability: 2/5

The core business of renting equipment is relatively simple to grasp, but the complexities of their operations (pricing models, fleet management, logistics etc) and the overall market make it moderately difficult to understand.

  • There are many areas that one has to study to properly value the business.
  • Many technical aspects of their business.

Balance Sheet Health: 3/5

The company’s balance sheet is rated at a 3/5. Although they have a decent amount of liquidity, the high amounts of goodwill, and their leverage ratio above the stated goals makes it a slightly below average balance sheet.

  • Positive Factors:
    • They had almost 600 million of cash at the end of the year.
    • They generate quite good free cash flow.
    • Most of their assets are in equipment that can be used as collateral to obtain loans.
  • Negative Factors:
  • Debt: While they are working on decreasing debt, they still have a significant amount of debt which could hurt them in downturns, and if rates increase higher. * Goodwill: A significant portion of their total assets are tied to goodwill, which is an intangible asset, that is mostly created during acquisitions. This could cause problems if acquisitions do not do as well as expected, or if the company is forced to divest its units at lower prices. * Slightly Below Average Ratios: While their returns on capital and equity are quite good, their current ratios and quick ratios are just ok, and there is not a very large safety net.