Modular Solutions Will Diversify Through New Markets Amid Cyclical Risks

Key Takeaways

• Recurring rental revenues and topline growth are supported by robust demand, market expansion, and increased adoption of rental models over outright ownership.
  
• Investments in technology, operations, and new market sectors are driving margin improvements, operational efficiency, and diversification of revenue streams.
  
• Weaker segment demand, higher operating costs, fleet underinvestment, unpredictable order flow, and end-market cyclicality could undermine revenue stability and profit margins.

Catalysts

Operates as a business-to-business rental company in the United States and internationally.

• Robust infrastructure projects and steady education spending are driving healthy quote activity, growing backlogs, and strong rental demand for modular solutions-supporting recurring revenue and topline growth potential even in mixed macro conditions.
  
• Expanding geographic presence and entry into new end markets (e.g., data centers, healthcare, industrial) through strategic hiring and acquisitions is expected to diversify and compound revenue streams, while mitigating cyclicality and supporting long-term earnings growth.
  
• Rising adoption of rental models as customers shift from owning to renting equipment-motivated by capital efficiency and flexibility-supports stable, higher-margin recurring rental revenues and reduces exposure to capital expenditure cycles.
  
• Investments in technology, digital platforms, and advanced fleet and sales management are improving operational efficiency, enabling margin expansion, reduced SG&A over time, and enhancing returns on invested capital.
  
• Capacity investments and strong performance in the Enviroplex (modular classroom manufacturing) and Modular Plus/site-related services businesses are unlocking operating leverage and driving stronger EBITDA margins and cash flow conversion.

McGrath RentCorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming McGrath RentCorp's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.8% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $89.9 million (and earnings per share of $3.67) by about August 2028, down from $252.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.9x on those 2028 earnings, up from 11.6x today. This future PE is greater than the current PE for the US Trade Distributors industry at 22.2x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.37%, as per the Simply Wall St company report.

McGrath RentCorp Future Earnings Per Share Growth

Risks

• Softer demand conditions in key segments, including lower average fleet utilization (down to 73.7% from 78.4% in Mobile Modular and 61.1% from 66.1% in Portable Storage) indicate cyclical and sector weakness, which may pressure both near-term and long-term revenue and earnings if these trends persist.
  
• Rising selling and general administrative expenses due to strategic hiring and ongoing investments in IT/digital infrastructure could permanently increase the company's cost base, potentially putting sustained pressure on EBITDA margins if topline growth does not accelerate.
  
• The company is relying on existing fleet inventory to meet demand instead of investing in new rental equipment, reflecting lower current and projected utilization-if demand remains below expectations, this could result in decreased future revenue growth and operational leverage.
  
• Delays and unpredictability in project sales and rental order conversion, due to macroeconomic uncertainty and fluid customer behavior, increase forecasting risk and could lead to lumpier, less predictable earnings and revenue streams across future periods.
  
• Portable Storage's ongoing susceptibility to fluctuations in commercial construction activity-described as "bouncing along the bottom" with only tentative signs of recovery-underscores long-term cyclicality risk in key end markets, potentially impacting consolidated revenue and EBITDA resilience.

Valuation

• The analysts have a consensus price target of $144.0 for McGrath RentCorp based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $89.9 million, and it would be trading on a PE ratio of 48.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of $118.51, the analyst price target of $144.0 is 17.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.