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Michael Mitchell

URI AT A GLANCE

P/E ► -0.661   EV/EBITDA ► -8.84   ROA ► -15% VERY LOW ROE ► -207.5% VERY LOW Debt to Equity ► -217   Current Ratio ► 1.85 AVG Interest Coverage Ratio ► -5.42 VERY LOW

 

 

 

 

 

 

United Rentals (NYSE:URI) rents construction equipment like aerial work platforms and forklifts. Its primary revenue sources are private commercial and residential construction companies, but it also rents to public clients like municipalities and utilities. URI rents over 2,900 different classes of equipment^[1] and holds about 10% of the equipment rental industry by revenue, the biggest share of any company in this segment.^[2] URI's large equipment fleet and geographic reach across the United States, Canada, and Mexico allow it to create an extensive equipment sharing network, maximizing usage and reducing the amount of equipment needed at each rental location.^[3]

United Rentals is exposed to the cyclical nature of the residential and commercial construction industries, but not in the same way as builders or equipment manufacturers. Downturns in the economy which hurt these industries mean slower demand for construction equipment. However, recessions provide increased incentives to rent rather than purchase equipment, which spurs demand for United Rentals' products and services. Revenue hit a record high of approximately $3.7 billion in 2007^[4] .

Business Overview

^[5]

United Rentals's rental units include general construction and industrial equipment like backhoes, forklifts and earth moving equipment; aerial work platforms, such as scissor lifts and boom lifts; general tools and light equipment such as pressure washers, heaters and hand tools; and trench safety equipment^[6]. The company operates 697 retail locations throughout the United States, Mexico and Canada, offering over 260,000 units of construction equipment^[7]. Although United Rentals is primarily a rental company, with about 70% of revenues generated from equipment rentals,^[8] the company also sells new and used equipment, contractor supplies and provides equipment service and maintenance.

Equipment Rentals (70% of Revenue)

Equipment rentals remains the core source of revenue for United Rentals, with over 6.4 million rental transactions to 900,000 rental customers in 2007^[9]. United Rentals rents general construction and industrial equipment on an hourly, daily, weekly or monthly basis^[10]. Equipment rentals totaled $2,630 million in revenue in 2007, a 4% increase from 2006, and had a gross margin of 38.7%^[11].

Sales of Contractor Supplies (10% of Revenue)

United Rentals also sells contractor supplies like tools and small equipment. Revenue from sales of contractor supplies amounted to $378 million in 2007^[12]. Mainly because of its relatively low gross margin (19%), United Rentals decided to begin downsizing its contractor supplies segment in 2007. United Rentals has repositioned this segment as more of a complementary offering by reducing inventory of contractor supplies at its rental locations and by closing down five of its nine contractor supplies distribution centers since early 2007^[13]. The company predicts an approximate 40% decrease in contractor supplies sales in 2008 compared to 2007 as a result of their refocus on its equipment rental segment^[14]. By reducing emphasis on this low margin business segment, United Rentals is able to refocus the efforts of its employees and sales representatives on its core equipment rental segment^[15].

Sales of Used Equipment (9% of Revenue)

United Rentals often sells its used rental equipment to customers through its national sales force, website, and auctions hosted on EBay (EBAY). The company sells its used equipment to reduce maintenance costs and manage the age and size of its rental fleet ^[16]. Sales of used equipment totaled $319 million in 2007 and operated at a gross margin of 26.3%^[17]. As a result of the company's refocusing initiative, United Rentals expects used equipment sales to decline 35% in 2008^[18].

Sales of New Equipment (6% of Revenue)

United Rentals sells equipment for many leading manufacturers including Honda Motor Company (HMC) , John Deere and Terex (TEX) to its customers. United Rentals earned $230 million in revenue in 2007 in this segment, which operated at a 17.4% gross margin^[19].

Service (5% of Revenue)

United Rentals also offers service and maintenance and sells new parts to equipment that is owned by its customers. The service segment made $174 million in revenue in 2007 while operating at a 54.6% gross margin^[20].

Business and Financial Metrics

^[21]

Revenue for United Rentals has increased approximately 6.6% since 2005. Equipment rentals grew 8.2% from 2005 to 2006 and an additional 4% from 2006 to 2007. Revenue from service provided increased 12.9% between 2005 and 2006 and grew by 10.1% from 2006 to 2007^[22]. Although rental rates, or amount charged hourly, daily or monthly to rent equipment decreased by 1.1% in 2007 increase in demand for equipment rentals helped United Rentals increase its revenue^[23]. During 2007, United Rentals decided to refocus on its equipment rental core business. Revenue in Q1 2008 showed beneficial impacts of the company's refocus as revenue increased 18.8% to $38 million in Q1 2008 from $32 million in Q1 2007^[24]. The refocusing efforts also contributed to the company's 2.5% increase of time utilization, or the amount of days a piece of equipment is on rent per year, in 2007^[25]. Operating income has also steadily increased since 2005, up 20.4% to $659 million in 2007^[26].

^[27]

Key Trends and Forces

Cyclical Nature of Construction Industry Causes Rental Demand to Fluctuate

United Rentals primarily rents its equipment to the commercial construction industry, with 90% of its revenue earned in this industry^[28]. Any decreases in the demand for construction resulting from macroeconomic factors like an economic recession, increased cost of construction materials, adverse weather conditions or an increase in interest rates will hurt the demand for construction equipment rentals. For example, the seasonality of the Commercial Real Estate construction industry, with lower construction in the winter months, causes demand for equipment rentals to fall as well during the winter. Conversely, factors such as an economic downturn actually increase incentive for companies to rent rather than purchase construction equipment. The commercial construction industry grew 16.2% in 2006 and an additional 16.7% in 2007, but has since slowed to low single digit growth^[29]. United Rentals, because of its large size and its national coverage, has a competitive advantage to its primarily regional competitors as United Rentals can detect and adjust to changes in the construction industry more easily than many competitors.

Rising Fuel Costs Hurts Rental Demand and Gross Margin

United Rentals maintains low inventory costs by grouping branches in groups of 6 to 12 according to geographic location^[30]. These groups share construction equipment, minimizing equipment idle time. United Rentals therefore relies on a highly mobilized fleet, which would be hampered by increased Oil Prices. Higher costs of fuel increase operating costs of equipment rentals, which then reduce United Rentals's gross margin. Also, rising fuel prices indirectly lowers equipment rental demand by raising the costs of steel and affecting major construction suppliers like US Steel (X).

Growth of Construction Equipment Rental Industry Leads to More Sales

The construction equipment rental industry in the United States reached approximately $37 billion in 2007. The industry overall has increased at a 10% compound annual growth rate since 1990^[31]. Particularly in an economic downturn, construction equipment rental becomes a better option for builders for several reasons:

• Companies do not have to make large capital investments needed to purchase equipment
• Rental companies offer a highly diverse selection of equipment and therefore provide the ability to best suit the needs of a specific job
• Renting equipment minimizes storage and transportation costs
• Renting equipment provides constant access to new technology without having to reinvest in new equipment^[32].

United Rentals, the largest equipment rental company by revenue, is poised to prosper from significant growth in the equipment rental industry as its broad geographic footprint and large equipment fleet lead to the acquisition of new customers much easier than its primarily localized competition which lack similar nationwide reach and brand recognition.

Acquisitions and Geographic Expansion

United Rentals has made five major acquisitions since 2005. High Reach Equipment Services, LLC, an aerial equipment supplier was acquired in 2007, the company's latest acquisition in an effort to expand their services geographically by acquiring smaller equipment rental companies nationwide^[33]. By expanding geographically, United Rentals seeks to achieve higher brand recognition and higher efficiencies in resource sharing between branches. During 2006 and 2007, United Rentals tried to open between 30 and 35 new branches annually, primarily through acquisition of smaller, localized companies^[34], but has since turned focus to maintaining its current rental locations^[35].

Competition

In 2007 the U.S. rental equipment industry totaled $37 billion in revenue^[36]. The equipment rental industry is dominated mainly by small, independent businesses with only one or two rental locations. Major publicly traded competitors include Hertz Global Holdings (HTZ) and RSC Holdings, Inc.

• Hertz most commonly associated with car rentals, rents construction equipment across North America and Europe. Hertz's equipment revenue increased 5% during 2007 as the company has adopted a similar expansion through acquisition strategy as United Rentals^[37].
• RSC Holdings, Inc. competes with United Rentals across North America. RSC employs a highly mobilized fleet similar to United Rentals and pools equipment among regions to increase equipment utilization. RSC's revenue increased 12.7% in 2007^[38].
• Equipment vendors and dealers like Caterpillar (CAT) sell and rent equipment directly to consumers also compete with United Rentals.

References

1. ↑ United Rentals 2007 10-K, Item 1, pg. 1
2. ↑ Calculated by dividing URI 2007 revenue by total 2007 industry revenue, United Rentals 2007 10-K, Item 1, pg. 1
3. ↑ United Rentals 2007 10-K, Item 1, pg. 3
4. ↑ United Rentals 2007 10-K, Item 1, pg. 1
5. ↑ United Rentals 2007 10-K, Item 7, pg. 19
6. ↑ United Rentals 2007 10-K, Item 1, pg. 1
7. ↑ United Rentals 2007 10-K, Item 1, pg. 1
8. ↑ United Rentals 2007 10-K, Item 7, pg. 24
9. ↑ United Rentals 2007 10-K, pg. 4
10. ↑ | United Rentals 2007 10-K, Item 1, pg. 4
11. ↑ | United Rentals 2007 10-K, Item 7 pg. 21 and 23
12. ↑ United Rentals 2007 10-K, Item 7, pg. 21
13. ↑ United Rentals 2007 10-K, Item 1, pg. 2
14. ↑ United Rentals 2007 10-K, Item 7, pg. 19
15. ↑ United Rentals 2007 10-K, Item 1, pg. 1
16. ↑ United Rentals 2007 10-K, Item 1, pg. 4
17. ↑ | United Rentals 2007 10-K, Item 7, pg. 21 and 23
18. ↑ United Rentals 2007 10-K, Item 7, pg. 19
19. ↑ United Rentals 2007 10-K, Item 7, pg. 21 and 23
20. ↑ United Rentals 2007 10-K, Item 7, pg. 21 and 23
21. ↑ United Rentals 2007 10-K, Item 8, pg. 42
22. ↑ United Rentals 2007 10-K, Item 7, pg. 24
23. ↑ Rental Pulse 2007 United Rentals Report, 1/13/2008
24. ↑ United Rentals First Quarter Report, 4/29/2008
25. ↑ United Rentals 2007 10-K, pg. 8
26. ↑ United Rentals 2007 10-K, Item 7, pg. 29
27. ↑ United Rentals 2007 10-K, Item 7, pg. 23 and Item 8, pg. 31
28. ↑ United Rentals 2007 10-K, pg. 6
29. ↑ United Rentals 2007 10-K Item 1, pg. 2
30. ↑ United Rentals 2007 10-K, Item 1, pg. 3 and pg. 16
31. ↑ United Rentals 2007 10-K, Item 1, pg. 3
32. ↑ United Rentals 2007 10-K, Item 1, pg.3
33. ↑ United Rentals 2007 10-K, pg. 53
34. ↑ United Rentals 2006 10-K, pg. 6
35. ↑ United Rentals 2007 10-K, pg. 4
36. ↑ United Rentals 2007 10-K, Item 1, pg.3
37. ↑ Hertz 2007 10-K, pg. 11
38. ↑ RSC Holdings, Inc. 2007 10-K, pg. 1
39. ↑ Hertz 2007 10-K, pg. 8
40. ↑ RSC Google Finance page