Has the Infrastructure Run Higher in United Rentals Finally Gone Too Far Too Fast?

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United Rentals Inc. (NYSE: URI) is a top-tier player when it comes to key construction and infrastructure stocks. If you have read 24/7 Wall St. for long, you would know it was a Trump infrastructure stock winner. But after an 80% run since the election, there is at least one call that maybe the best has been seen here.

The independent research firm Argus has downgraded United Rentals shares to Hold from Buy. Their view is that the endless gains have taken shares up perhaps too high.

United Rentals posted strong fourth-quarter earnings and appears likely to continue on its multiyear earnings recovery. Argus pointed out that it now valued at 14.4 times the firm’s 2017 earnings expectation, and that takes it back in line or closer to the industrial sector average. Argus expects that United Rentals will benefit from more favorable pricing and a modest increase in rental volumes, as well as a continued growth in specialty operations and a further decline in its interest expense.

The fourth-quarter earnings of $2.67 per share (adjusted) was up from $2.19 a year earlier. More importantly, it was a whopping $0.43 above the consensus forecast. Thursday’s report shows that Argus expects a 2.8% increase in 2017 revenue after a 1% decline in 2016. The firm also raised its 2017 earnings estimate to $9.02 per share (from $8.88) and it initiated its 2018 forecast of $9.93 in earnings per share.

Argus highlighted several more positive developments for United Rentals:

In January 2017, United Rentals announced the acquisition of NES Rentals for $965 million in cash. Management expects the transaction to close in 2Q17 and to be accretive to earnings, revenue, EBITDA and free cash flow this year. … In July 2016, United Rentals introduced an online service that fully automates the equipment rental process, allowing renters to select, order, confirm and pay for equipment. The automated service is the first of its kind in North America and is available to all commercial and consumer renters. … In April 2014, URI completed the $849 million purchase of National Pump, the second-largest specialty pump company in North America.

Argus did admit that United Rentals investors do face some risks. Some are not to be taken lightly. The report said:

These (risks) include the company’s highly cyclical business, significant debt, and exposure to the oil and gas industry. The company must also spend heavily to expand and maintain its fleet of rental equipment.

Thursday’s valuation analysis was as follows:

United Rentals has seen strong growth over the past five years, which might ordinarily indicate that it was nearing the top of its business cycle. However, given the relatively modest global economic recovery during this period, we believe that the company is poised for a longer-than-typical upturn and view the recent period of flat revenue as temporary. Management has noted that business activity remains healthy in its core U.S. markets, and recently cited an IHS Markit forecast calling for 5% annual growth in the U.S. construction sector from 2016 through 2019.

If you read through the Argus downgrade, the key takeaway should be that it is just a valuation downgrade after excessive gains (after all, an 80% stock pop is quite high, even for Trump infrastructure stocks).

And back to the United Rentals not being new as a Trump infrastructure play. United Rentals will win from the Keystone XL pipeline installations.

United Rentals was also talked up by Jim Cramer after its CEO appeared on CNBC’s Mad Money, and Cramer called it a cheap Trump stock investors want after being in the dog house for 2015’s oil drop. Cramer’s view was that 14 times expected earnings is still rather cheap. After earnings last week, United Rentals was raised to Outperform from Market Perform with a $145 price target (versus a prior closing price of $114.26) at Avondale Research.

Shares of United Rentals were last seen down 1.9% at $127.42, in a 52-week range of $41.90 to $131.19. Its consensus analyst price target is $122.36, and its market cap is $10.7 billion.