|Shares Out. (in M):||93||P/E||28.0x||8.2x|
|Market Cap (in $M):||3,522||P/FCF||NA||NA|
|Net Debt (in $M):||7,303||EBIT||880||1,194|
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Investment Recommendation: I recommend a long position in United Rentals (“URI” or “The Company”) with an estimated price target ~$55 (~45% higher than current levels). The Company is misunderstood as a purely cyclical business and the market underappreciates changes the Company has made to position themselves in a secular sweetspot. In particular, the trend towards renting equipment rather than purchasing it has yet to play itself out and will continue to progress, despite any potential cyclical setbacks in the economy. Beyond that, URI will continue to leverage their scale to take share within the equipment rental category. Finally, any rebound in domestic construction, industrial production or manufacturing will only serve to further benefit the Company. The recent acquisition of RSC has reinforced URI’s position as the market leader (they now have ~3x the market share of their next largest peer) and leaves them the logical beneficiary of industry growth. Additionally, the merger will provide meaningful synergies and a substantial boost to EBITDA over the next 12-18 months.
|All figures in MM||FY Ending 12.31||2011||2012E||2013E||2014E||2015E||2016E||2017E|
|FD Shares (MM)||92.7||Change||59.0%||25.6%||10.6%||7.1%||5.2%||4.2%|
|Enterprise Value||$10,825.6||Net Capex||585.0||1,090.2||1,003.3||1,031.7||1,053.3||1,053.0||1,040.1|
|Levered FCF Yield||18.4%||25.1%||30.6%||35.9%||41.0%|
United Rentals is the largest equipment rental company in the world. ~84% of total revenue comes from rental of construction and maintenance equipment. The remaining 16% of revenue is derived from sales of used equipment, service revenue, sale of new equipment and supplies.
Equipment rental (~84% of revenue, ~80% of EBITDA) is the core of URI’s business.
Non-equipment rental (~16% of revenue, ~20% of EBITDA).
The equipment rental market is undergoing structural changes which provide tailwinds to URI. These structural changes will increase the sustainable margin profile and make the Company less cyclically exposed. As this process has progressed, the Company has been able to achieve record margins with rental rates still ~5-8% below previous peaks.
The Company is in a sweet spot for growth with a secular shift towards renting, increased share for large companies within the renting category, and (possibly) rising US industrial production. The equipment rental industry is projected to grow at an 8% CAGR over the next three years.
Triangulating between several valuation methods suggest fair value for the stock ~$55. Importantly, the modest leverage on the Company accelerates shareholder stock appreciation, even absent multiple expansion.
|Perpetuity Growth Rate Analysis|
|2017 Normalized FCF||$987.2|
|Perpetuity Growth Rate Analysis||2.0%|
|Implied Terminal Value||$12,587.3|
|NPV of Interim CF||$5,028.7|
|NPV of Terminal Value||8,597.3|
|Implied Total EV||$13,626.0|
|less total debt||7,303.0|
|Total Equity Value||$6,323.0|
Deleveraging Value Creation/EBITDA Multiple
|Deleveraging Value Creation|
|NTM EV/EBITDA Multiple||5.5x||5.5x||5.5x||5.5x||5.5x|
|less net debt||6,758.6||6,426.4||6,077.4||5,846.5||5,754.6|
|Implied Equity Value||$6,644.3||$7,958.9||$9,106.0||$10,025.2||$10,936.9|
|Diluted Shares (MM)||105.3||105.3||105.3||105.3||105.3|
|Implied Share Price||$63.12||$75.60||$86.50||$95.23||$103.89|
|Stock price sensitivity to NTM Multiple:|
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