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 lowers expenses when compared to the outright purchase of equipment so the demand for skilled leasing firms is on the rise.

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 expected to grow annually at approximately 12.3%.

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 makes money from equipment rentals, as well as sales of rental and new equipment in addition to selling contractor supplies and services, though it can’t be overstated that equipment rentals make up the bulk of its top line

Most sales are made in the US, but United Rentals also sells around the world, from North America to Europe, and Australia plus 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 have steadily climbed in each of the years that followed the 2020 slowdown and annual sales have climbed by 12.2% annualized over the past five years.

In 2023, revenues rose quite dramatically by 23.1% year-over-year to $14.33 billion and equipment rentals made up 84.2% of the total figure, resulting in management reporting a top line of $12.06 billion, a 19.3% YoY increase.

More importantly, top lines are translating to bottom line profitability with EBITDA growing at a five-year annualized rate of 12.2%, and earnings per share climbing annually by 20.2%. Last year, the adjusted EBITDA eclipsed $6.86 billion, which resulted in growth of 22.1% year-over-year. 

It wasn’t all sunshine and roses, though with net income margin sliding from 18.1% in 2022 to 16.9% in 2023, and EBITDA margin falling from 48.3% to 47.8%. Likely this is more a point of caution in light of the overall growth that has been apparent.

It’s clear now that higher margin opportunities are a focus for management as well as having a keen eye on its end-market mix. As of Q2 2024, equipment rental revenues climbed by modestly 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 EBITDA to come in somewhere between $7.09 billion and $7.24 billion, which will represent a solid increase from the previous guidance of between $7.04 billion and $7.29 billion if it comes to fruition.

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.