Portable Storage Demand Will Soften While Mobile Modular Offers Future Potential

Key Takeaways

• McGrath RentCorp faces soft demand and interest rate challenges in Portable Storage, impacting rental revenues and future earnings.
  
• Industry-wide slowdown in test and measurement equipment markets affects TRS-RenTelco, impeding revenue and earnings recovery.
  
• Strategic capital allocation, including pursuing M&A opportunities and enhanced service offerings, positions McGrath RentCorp for long-term growth in revenue and profitability.

Catalysts

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

• McGrath RentCorp faces potential uncertainty in overall demand, particularly in Portable Storage and TRS businesses, which may continue into 2025. Soft demand could negatively impact future revenue growth.
  
• Interest rate headwinds and weak commercial construction activity are affecting the Portable Storage business, causing rental revenues to decline. This trend could pressure future earnings if demand does not recover.
  
• TRS-RenTelco is experiencing an industry-wide slowdown in the test and measurement equipment markets, which could continue into the next year, impacting revenue and earnings recovery.
  
• Delays in new project shipments and higher-than-expected returns in the Portable Storage segment highlight demand challenges that could compress revenue and net margins.
  
• The company may face potential delays from natural disasters and interest rate fluctuations, affecting customer project timelines, which might impede revenue growth and impact financial performance.

McGrath RentCorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming McGrath RentCorp's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.3% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $135.5 million (and earnings per share of $5.47) by about December 2027, down from $224.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.5x on those 2027 earnings, up from 13.1x today. This future PE is greater than the current PE for the US Trade Distributors industry at 18.0x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.29%, as per the Simply Wall St company report.

McGrath RentCorp Future Earnings Per Share Growth

Risks

• McGrath RentCorp's recent termination of the acquisition by WillScot resulted in a significant termination fee of $180 million, which strengthens their cash position and provides flexibility for future investments. This could positively impact future earnings.
  
• The Mobile Modular business showed strong performance, with rental revenues growing by 9% and sales revenues by 14%, demonstrating operational resilience and contributing positively to both revenue and net margins.
  
• The company has maintained strong pricing dynamics within the Mobile Modular business, contributing to an increase in rental margins from 59% to 62% year-over-year, which could bolster profitability.
  
• Initiatives like Mobile Modular Plus and increased service offerings have begun to enhance revenue streams, showcasing potential long-term growth avenues that could positively affect both revenue and net margins.
  
• McGrath's focus on strategic capital allocation, including possible M&A opportunities in Portable Storage and Modular business segments, reflects a growth-driven strategy that may positively influence long-term financial performance, impacting revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $135.0 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 2027, revenues will be $990.1 million, earnings will come to $135.5 million, and it would be trading on a PE ratio of 29.5x, assuming you use a discount rate of 7.3%.
• Given the current share price of $119.81, the analyst's price target of $135.0 is 11.3% 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.