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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

United Rental

August 10th 2015

United Rental
NYSE Symbol: URI
Industry: Equipment Rental
Price as of 8/9: $63.81


The clock has turned to the slowest time of the year. August, the weakest month of the year, has wasted little time selling off two percent. The Dow is in the red for the year while the S&P 500 is clinging to positive territory for now. The next two months will be interesting. With second quarter earnings over and global growth continuing to slow due in large part to China, the major averages should push lower with a 10% correction highly likely. The economic slowdown and the recent rise in the US dollar is hurting a lot of commodities including oil. Barron's had a cover piece this weekend saying the commodity sector may be ready to buy. It's true a lot of bad news has been priced into the sector, but it also feels like there is more downside and therefore no rush to jump in. Typically the stocks to rebound first out of a correction are not the stocks or sector that started the correction. Think of the tech bubble. It's taken Microsoft 15 years to finally surpass its 2000 highs. Cisco Systems, the Apple of the 1990s, will never regain its 2000 highs. The financial crisis saw Lehman Brothers go away, a number of other banks go under and get taken over while others like Citigroup got diluted to the point they will never see their old highs. But having said that, a number of stocks are selling off with great long term prospects including this week's featured stock, United Rental. United Rental, an equipment, particularly heavy equipment rental company has been on a tear the last several years as sales and earnings have grown exponentially. In 2015 sales and earnings have slowed to a more modest level causing the stock to drop nearly 50% since December. With the recent pullback, United Rental looks attractively priced trading for 8 times earnings, 1 times sales, and a one billion share buyback plan in place which equates to a one fifth of their market cap. In the short term, the fundamentals may remain under pressure with an 11% exposure to the oil and refining sector, but longer term the $1 billion share buyback and a reacceleration in growth possibly next year should make United Rentals a big winner.

Back on July 22nd, United Rentals reported second-quarter earnings of $86 million. On a per-share basis, the Stamford, Connecticut-based company said it had profit of 88 cents. Earnings, adjusted to extinguish debt and for costs related to mergers and acquisitions, were $1.95 per share, easily beating estimates, but revenue of $1.43 billion in the period missed Street forecasts. The main reason for the 6% decline in the stock following earnings was due to lower full year revenue guidance. The new guidance is for $5.8-5.9 billion vs. $6.1 billion consensus. Not much of a miss. Longer term, management is much more constructive. In the conference call management made statements indicating that demand for their equipment is clearly there, and the industry is expected to benefit from solid growth in the years ahead as oil drilling stabilizes and rental fleet is absorbed. Industry experts are projecting years of growth ahead, led by the ongoing rebound in non-residential construction. Given this outlook, management is accelerating their current $750 million share repurchase program and announcing an additional $1 billion repurchase program.

As mentioned earlier, United Rentals trades for a cheap valuation of 8 times earnings, 7 times next year's numbers, 1 times sales, with a billion dollar buyback plan in place that could buyback 20% of the company's float. Following earnings a couple analysts lowered their targets, but still see the stock rising to $85 to $94 a share. The stock only needs to trade for 11 times earnings to rise back above the $100 a share or a 56% return from current levels. In the short term, the stock may remain under pressure, but a lot of bad news is priced into the stock and when sales and earnings reaccelerate, United Rentals should be a big winner.