Is United Rentals Stock Overvalued? 

Equipment leasing is a booming business. Companies that operate in this segment of the market have expertise in facilitating the acquisition of critical equipment for commercial, non-profit, and government organizations.

This service increases business efficiency and reduces expenses when compared to the outright purchase of equipment. As a result of these advantages, the demand for skilled leasing companies is growing.

According to respected market analysis firm Allied Market Research, the global equipment finance market is set to reach $3.1 trillion by 2032, which translates to a CAGR of 9.7%.

The equipment lease segment is projected to see a CAGR of 12.3% due to the flexibility it offers businesses and the fact that it removes the need for large upfront investments.

For the moment, the equipment rental market is fragmented, so it is hard for investors to pick a winner but United Rentals, Inc. (NYSE:URI) appears set to take the lead.

It is already the largest equipment rental company in the world, with an integrated network of 1,647 rental locations. And as of 2022, United Rentals had a 16% share of the total US equipment rental market. 

That explains to some extent why United Rentals stock has been on a tear over the past 5 years but is it now overvalued? 

What Exactly Does United Rentals Do?

United Rentals earns revenue from equipment rentals, as well as sales of rental and new equipment in addition to selling contractor supplies and services. Of course, equipment rentals make up the bulk of its top line

Geographically, the majority of revenues originates from US customers, but United Rentals also has a presence in the rest of North America, Europe, Australia, and New Zealand. 

United Rentals is not minnow in the ocean with a whopping 4,800 classes of equipment for rent. The company’s size gives it greater purchasing power and the ability to better maintain its fleet, which in turn allows it to outperform competitors on both cost and quality.

In fact, United Rentals counts the $21.3 billion rental equipment fleet as one of its prime competitive advantages.

United Rentals Growth & Profitability Impress 

Revenues increased in each of the years that followed the 2020 slowdown and annual sales now shows a five-year CAGR of 12.2%.

In fiscal 2023, the company’s revenues flew higher by 23.1% year-over-year for a total of $14.33 billion. Equipment rentals made up 84.2% of the total figure, and United Rentals posted a top line of $12.06 billion. That comes out to a 19.3% increase from the prior year.

More importantly, bottom-line performance is going up. United Rentals’ annual adjusted EBITDA has a five-year CAGR of 12.2%, and adjusted earnings per share has a CAGR of 20.2%. Last year, the adjusted EBITDA reached a really impressive $6.86 billion, which resulted in growth of 22.1% year-over-year. 

It wasn’t all sunshine and roses, though, and some contraction in the margins during this period did appear. Specifically, United Rentals’ net income margin dipped from 18.1% in 2022 to 16.9% in 2023, and the adjusted EBITDA margin dropped from 48.3% to 47.8%. Likely this is more a point of caution in light of the overall growth that has been apparent.

Management noted that the company is migrating towards higher margin opportunities and improving its end-market mix. As of Q2 of fiscal 2024, total revenues and equipment rental revenues both climbed by moderately high single-digit percentages compared to the prior year period.

United Rentals’ Expected Slowdown

United Rentals narrowed its 2024 revenue outlook from a range of $14.95 billion – $15.45 billion to a range of $15.05 billion – $15.35 billion.

While these are still respectable figures, the lower range indicates an increase of just 6.1% over 2023 at the midpoint. That is quite a slowdown when compared to last year’s result of 23.1%.

Management is forecasting itsadjusted EBITDA to be in the range of $7.09 billion – $7.24 billion, marking an increase from the previous guidance of $7.04 billion – $7.29 billion.

With the current projections, United Rentals’ adjusted EBITDA will show 4.4% year-over-year growth. Once again, this is evidence of a sharp slowdown when compared to last year’s 22.1% figure.

Is United Rentals Stock Overvalued?

United Rentals stock appears to be 3.6% overvalued according to the consensus price target of analysts which is $798 per share.

Sentiment has been skewing increasingly negative among Wall Street with 4 analysts downgrading their earnings estimates for the quarter.

That’s not entirely a surprise given the company trades at a 20.5x price-to-earnings ratio but with 10.4% net income growth forecast for the coming five years there is reason to believe it’s not as elevated as it appears at first glance.

The PEG ratio of 1.80 suggests it’s somewhat overvalued too as does the price-to-sales ratio over the past twelve months of 3.6x.

When you look to a discounted cash flow forecast analysis it’s even more pessimistic and places fair value at $719 per share, suggesting material downside risk for new investors.

So, while there’s lots to like about the fundamentals, most especially growth and profitability, it seems the word is out and the price has run a little too far too fast for new investors to feel comfortable about the reward to risk ratio of entering now.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.