Evaluating McGrath RentCorp After Q1 Earnings Beat and Recent Share Price Slide

If you’re wondering what to make of McGrath RentCorp these days, you’re not alone. Investors are watching closely as the stock, which closed at $115.28, has seen its share of ups and downs recently. Over the past week, it inched down by 1.4%, and the last month has brought an 8.3% pullback. Still, if you zoom out, things look much rosier. McGrath RentCorp has delivered a 4.5% gain year-to-date, 7.9% over the last year, and an impressive 85.3% over five years. That kind of long-term trajectory does not happen by accident and speaks to a business that has weathered shifting market conditions well.

Some of the latest moves could be traced to broader market developments influencing industrial equipment and rental companies, with investor sentiment swinging between optimism for infrastructure growth and caution about economic uncertainty. Short-term hiccups aside, there is an argument building that the market might not be fully appreciating McGrath RentCorp’s value just yet. Our valuation assessment shows the company is undervalued in five out of six checks, giving it a very respectable value score of 5.

How is that undervaluation calculated, and what does it mean for your next move? In the next section, I’ll break down the valuation approaches used, and later, reveal an even more insightful way to think about what McGrath RentCorp might be worth.

Why McGrath RentCorp is lagging behind its peers

Approach 1: McGrath RentCorp Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company’s intrinsic value by projecting its future cash flows and then discounting those amounts back to their present value. This approach helps investors understand what the company is truly worth today, based on the money it will likely generate years from now.

For McGrath RentCorp, the most recently reported Free Cash Flow stands at $169.86 million. Analysts project that by 2026, Free Cash Flow will reach $212.39 million, reflecting strong expected growth. Beyond the direct analyst forecasts, further estimates modeled by Simply Wall St suggest ongoing increases, with Free Cash Flow potentially rising to $345.74 million by 2035. All calculations consider values in US dollars.

By discounting these future cash flows appropriately, the model estimates an intrinsic fair value of $198.14 per share. With the current share price at $115.28, this implies the stock is about 41.8% undervalued according to the DCF model.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for McGrath RentCorp.

Our Discounted Cash Flow (DCF) analysis suggests McGrath RentCorp is undervalued by 41.8%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: McGrath RentCorp Price vs Earnings (P/E) Analysis

The Price-to-Earnings (P/E) ratio is a widely used and suitable valuation tool for profitable companies like McGrath RentCorp. It expresses how much investors are willing to pay today for a dollar of current earnings, giving a snapshot of market sentiment and profitability.

Not all P/E ratios are created equal. A "normal" or "fair" P/E ratio for a company depends on its expected earnings growth, consistency of profits, risk profile, and how it compares within its industry. Faster-growing, less risky companies often justify higher P/E ratios, while those facing uncertainty typically trade at lower multiples.

Currently, McGrath RentCorp trades at a P/E of 11.24x. That is substantially lower than both the Trade Distributors industry average of 22.72x and its peer group’s average of 58.34x. This signals that the market is pricing its earnings far more conservatively. However, industry and peer comparisons do not capture company-specific strengths and risks.

This is where Simply Wall St's "Fair Ratio" comes in. The Fair Ratio for McGrath RentCorp is 8.72x, calculated by analyzing factors like its growth outlook, profit margins, unique risks, industry, and market cap. This proprietary benchmark gives a more tailored and precise perspective than blanket comparisons. Because this Fair Ratio is only slightly below the company’s current P/E, the stock appears to be trading at about the right level for its fundamentals.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your McGrath RentCorp Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives. Narratives are a simple, approachable way for investors to connect the story they see unfolding at a company with their assumptions about future numbers, like revenue growth, earnings, and profit margins. This approach brings the “why” behind your valuation into focus.

With Narratives, you can easily put forward your perspective on McGrath RentCorp, forecasting how you think the business will perform and estimating its fair value. The key advantage is that Narratives directly link the company’s story and future outlook to a financial forecast and ultimately to a fair value. This makes it clearer whether today’s price looks attractive for buying or warrants caution for selling.

Narratives are accessible and dynamic. On Simply Wall St's Community page, used by millions of investors, you can easily create or explore Narratives that automatically update when new information such as earnings or news comes in, letting you stay on top of your investment thesis as the facts change.

For example, one Narrative sees McGrath RentCorp diversifying into new markets and overcoming cyclical headwinds with robust recurring revenues, projecting a $144 fair value. Another highlights risks of margin pressure and sector weakness, favoring a much lower value.

Do you think there's more to the story for McGrath RentCorp? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com