Accelerating Growth In Construction And Industrial Markets Drives Robust Revenue And Earnings

Key Takeaways

• Growth in construction and industrial markets and technology investments are expected to boost revenue and improve margins.
  
• Strong capital efficiency, share buybacks, and dividends may enhance earnings and support robust shareholder returns.
  
• Potential economic fluctuations and project delays could negatively impact United Rentals' revenue growth and profitability, with significant investments at risk amid market downturns.

Catalysts

Through its subsidiaries, operates as an equipment rental company.

• United Rentals is experiencing growth in both its construction and industrial end markets and anticipates continued growth into 2025 with large complex projects still in the early stages; this is likely to positively impact revenue.
  
• The company's Specialty rental revenue grew an impressive 24% year-over-year, bolstered by acquisitions and cross-selling efforts; this segment's continued expansion is expected to contribute to revenue growth and improved margins.
  
• Investments in new technology, such as next-generation telematics products and the ProBox OnDemand tool tracking system, are anticipated to improve operational efficiency and customer service, which could enhance net margins.
  
• United Rentals is maintaining a strong focus on capital efficiency, leading to robust free cash flow generation projected to hit record levels, which could support further investment and shareholder returns, potentially increasing earnings.
  
• With substantial share buybacks and dividends underway, returning nearly $2 billion to shareholders this year and projecting continued shareholder returns, United Rentals' EPS is expected to benefit from reduced share count and strong capital allocation strategies.

United Rentals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Rentals's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.1% today to 19.4% in 3 years time.
• Analysts expect earnings to reach $3.4 billion (and earnings per share of $54.39) by about November 2027, up from $2.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2027 earnings, down from 22.0x today. This future PE is greater than the current PE for the US Trade Distributors industry at 16.9x.
• Analysts expect the number of shares outstanding to decline by 1.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.44%, as per the Simply Wall St company report.

United Rentals Future Earnings Per Share Growth

Risks

• United Rentals faces risks from potential fluctuations in economic conditions, such as rising interest rates, which could affect construction projects and capital spending, ultimately impacting revenue growth.
  
• The company's reliance on large, complex projects means any problems or delays in these could affect rental revenue and profits negatively.
  
• There is significant capital expenditure in fleet growth, and any global or market downturns could lead to lower equipment utilization, directly impacting earnings.
  
• Potential headwinds in certain industrial verticals, like petrochemicals, could affect segment revenues, particularly if these challenges persist or worsen.
  
• Despite significant investments in technology and innovation, which aim to improve operations, failure to achieve expected efficiency improvements could compress net margins due to continued operating cost increases.
  

Valuation

• The analysts have a consensus price target of $830.06 for United Rentals based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1239.0, and the most bearish reporting a price target of just $565.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $17.4 billion, earnings will come to $3.4 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $858.83, the analyst's price target of $830.06 is 3.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.