Commercial Services company United Rentals is taking Wall Street by surprise today, falling to $360.72 and marking a -7.3% change compared to the S&P 500, which moved -1.0%. URI is -19.93% below its average analyst target price of $450.53, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, United Rentals shares have outstripped the S&P 500 by 23.0%, with a price change of 13.7%.
United Rentals, Inc., through its subsidiaries, operates as an equipment rental company. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
United Rentals's trailing 12 month P/E ratio is 12.4, based on its trailing EPS of $29.14. The company has a forward P/E ratio of 8.2 according to its forward EPS of $44.14 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.33, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide United Rentals's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.6. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on URI's margins:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 11,642,000 | 6,646,000 | 42.91 | 8.19 |
| 2021-12-31 | 9,716,000 | 5,863,000 | 39.66 | 6.27 |
| 2020-12-31 | 8,530,000 | 5,347,000 | 37.32 | -4.92 |
| 2019-12-31 | 9,351,000 | 5,681,000 | 39.25 | n/a |
- Average gross margin: 39.8 %
- Average gross margin growth rate: 2.4 %
- Coefficient of variability (higher numbers indicating more instability): 5.8 %
United Rentals's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for United Rentals was $743,000,000.00 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, URI is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 26.6% and has on average been $852,000,000.00.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. United rentals's P/B ratio is 3.5 -- in other words, the market value of the company exceeds its book value by a factor of more than 3, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.
United Rentals is likely fairly valued at today's prices because it has a very low P/E ratio, an average P/B ratio, and an irregular stream of positive cash flows with an upwards trend. The stock has strong growth indicators because of its consistent operating margins with a stable trend, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into URI's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
