What Do United Rentals Earnings Tell Us About Spending on US Infrastructure?

April 18, 2019 by Paul Ausick

Share of construction equipment rental firm United Rentals Inc. (NYSE: URI) traded up about 7.6% Thursday morning following the company’s first-quarter earnings announcement. Adjusted earnings per share (EPS) came in at $3.31, well above the consensus estimate of $3.03, and up 15.3% compared to first-quarter 2018 results. Total revenues rose 22% year over year to $2.12 billion and rental revenue increased by 23% to $1.8 billion.

According to an investor presentation released with this morning’s earnings announcement, nearly half (48%) of the firm’s customers are industrial and non-construction businesses in the manufacturing, oil and gas, and manufacturing. Nearly as many (47%) are involved in non-residential construction businesses, and only 5% are municipalities, government agencies or homeowners. The largest piece of United’s revenues comes from nonresidential construction (more than a third) while infrastructure accounts for more than 10% and residential construction about 3%.

But infrastructure can include public construction of things like new schools and hospitals, highways and streets, and public housing. In the Census Bureau’s latest report on U.S. construction spending, total public construction (including residential building) begun in February rose by 11.5% year over year to $325.77 billion on a seasonally adjusted annual basis. Not seasonally adjusted, for the first two months of 2019, new public construction totaled $39.9 billion, a rise of 8.9% compared to the first two months of last year.

As the infrastructure pie grows — and it will have to accommodate urgently needed repairs and reconstruction from natural disasters like the recent flooding in Nebraska — United Rentals finds itself in a strong position to benefit from demand.

Consider what’s happening in Nebraska. More than a hundred bridges are out of service, hundreds if not thousands of miles of roads are unusable, and drinking water supplies have been fouled. In the sparsely populated parts of the state where damages were severe, local governments have no long-term need to own enough equipment to handle an emergency like the one they now face. If a major event happens in one small county, it would likely call its neighboring county to borrow some equipment.

That can’t happen now. Every piece of equipment is needed right where it is. United Rental has an opportunity here and it could have an even bigger one if it can figure out the logistics of moving some of its 665,000 pieces of equipment from more than 1,000 U.S. stores scattered across 49 states to the location where the equipment is most needed. Moving rental equipment from where it is to where the next (inevitable) natural disaster occurs is virtually guaranteed to be a growth business as the earth’s climate heats up and generates more severe weather.

The other less predatory-sounding opportunity is that the U.S. Congress eventually will pass a massive infrastructure spending package. That may happen, irrespective of the political party in control of Congress or who occupies the Oval Office. History would indicate that betting the business on congressional action may offer a big reward, but the risk could be even bigger.

United Rentals finds itself with opportunities at all turns. But as a proxy for infrastructure, it appears to be a lagging, not a leading, indicator. That’s still a pretty good position for the company to be in, and one that investors might like as well. Shares traded up about 8% shortly after the noon hour Thursday at $135.76 in a 52-week range of $94.28 to $175.75. The consensus 12-month price target is $153.64, implying a potential upside of 13.6% on a stock with a forward price/earnings ratio of 6.34.


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