Acquisition Of H&E To Expand Capacity And Meet Long-Term Customer Demand

Key Takeaways

• The acquisition of H&E aims to boost long-term growth by enhancing capacity and optimizing the balance sheet for potential revenue and earnings growth.
  
• Specialty rental segment expansion and increased capital expenditure on fleet will drive future revenue, supported by customer optimism and project backlogs.
  
• Inflation, interest rate changes, and used equipment sales decline could compress profitability, while integration efforts and focus on debt reduction limit cash flow flexibility.

Catalysts

Through its subsidiaries, operates as an equipment rental company.

• The acquisition of H&E is expected to enhance United Rentals' growth by adding high-quality capacity, including people, fleet, and real estate, contributing to long-term customer demand and potentially increasing future revenue.
  
• Continued strong growth in the specialty rental segment is anticipated, driven by same-store sales growth and expansion through new cold-starts, positively impacting both revenue and net margins.
  
• The company is planning to allocate significant growth capital expenditure, focusing on specialty growth and fleet expansion, which is expected to drive future revenue and maintain fleet productivity.
  
• Increased customer optimism and backlog, particularly in large projects and key verticals like nonresidential construction, suggest an expectation of sustained or accelerated activity, which may enhance future revenue growth.
  
• The completion of H&E will allow United Rentals to focus on reducing leverage, using free cash flow, which can optimize their balance sheet and potentially increase earnings per share through more efficient capital allocation.

United Rentals Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming United Rentals's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 18.7% in 3 years time.
• Analysts expect earnings to reach $3.3 billion (and earnings per share of $52.86) by about April 2028, up from $2.6 billion 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 17.5x on those 2028 earnings, up from 14.0x today. This future PE is greater than the current PE for the US Trade Distributors industry at 17.1x.
• Analysts expect the number of shares outstanding to decline by 1.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.03%, as per the Simply Wall St company report.

United Rentals Future Earnings Per Share Growth

Risks

• Macroeconomic uncertainties and changes in interest rates could impact large project growth and small local market demand, affecting future revenue growth.
  
• Anticipated declines in the used equipment sales on a year-over-year basis could negatively impact revenue streams, with results expected to normalize compared to post-pandemic highs.
  
• Specialty and ancillary services, though growing, come with lower margins, potentially leading to mixed effects on overall net margins despite higher revenue.
  
• The integration of H&E and the suspension of share buybacks to focus on debt reduction may limit cash flow flexibility and investor returns in the short term, potentially affecting earnings and capital allocation strategies.
  
• Inflationary pressures on fleet and maintenance costs, despite some easing, could continue to compress EBITDA margins, challenging profitability.

Valuation

• The analysts have a consensus price target of $748.059 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 $1238.0, and the most bearish reporting a price target of just $485.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $17.6 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 8.0%.
• Given the current share price of $551.94, the analyst price target of $748.06 is 26.2% higher.
• 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.