WeiChiLoh

Utilization rates peaked in 2007 and bottomed in 2009. Free cash flow was $242 million in 2007 and was $367 million in 2009. I understand your point on URI's weak ROIC. The WACC can change though, especially given the enormous expected share buyback. URI also has some callable high coupon debt in the 7-3/8% + range. I don't know what they could realistically refinance that at in today's market, but it seems crazy to think they couldn't roll that debt into a better rate at the next call, which May 2016. I think the equity market has already priced in a lot of pain which may or may not even occur. Indeed this is not a blue chip company and I wouldn't want to be the person buying at an all time high, but we are $70 off the all time high of last summer. Free cash flow is expected to be $900 million this year and the market value of the equity is only $4.4 billion. URI is projecting a $700 million buyback for this year and all free cash flow above this level will go towards debt repayment. How do you balance the textbook argument that a low ROIC company has little value vs. the real world argument that free cash flow is king? This is something I struggle with as I am a "count the cash" style investor. Yes the 2016 projected cash flow is high but once you take into account of normalized margins, FCF generation drops dramatically. This is operating leverage + financial leverage.

here is another way of looking at it. What is URI normalized ROIC? A look in history and one can see that is is constantly below cost of capital. The smaller players not being able to get financing and shift to penetration after the GFC led to ROIC being temporarily above ROIC today (~11% - not much too). If it is going to pre-GFC levels, what multiple of IC would you pay for this company? This is an asset intensive company so tangible IC is a relevant metric. I reckon less than 1 right? Just like how you wont pay more than 1x BV for a business that ROE<CoE, you wont pay more than 1x IC when ROIC<WACC. At 1x IC, equity value is largely wiped.

Dependent on 3rd party rental rates though. I used 8.50

i did a rough valuation on SRG and got to a $40 fair value. Seems like the market is pricing this appropriately.

URI has little to no franchise value. The industry is extremely fragmented - thousands of players. The company is clearly over-earning. Utilization and daily rental rates are both above the previous peak in 2007. The reason why this is so is because many smaller players were not given access to capital after the GFC at a point in time when construction companies are switching to renting as a risk management strategy. Financing is coming back to the smaller players today and at 50%+ pre-tax IRR on incremental equipment (see URI IR deck), utilization and rental rates will come down in a big fashion because this business has huge operating leverage. Huge operating leverage + huge debt load (5.5x net debt to ebit) + focus on share repurchase + cyclical top = pain it always look cheap at the top.

What worries me the most in this name is historical margins were held up by SG&A cuts. Gross margins are deteriorating. Also, the company is getting more levered from an operating leases standpoint which can quickly work against the company.

cash on the balance sheet is fictitious. this is the problem with secular declining negative WC companies. as the business decline, cash winds down.

Hupsteel. Trades at 60% of NCAV. Doesnt burn cash. Is in fact liquidating so that NCAV is turning to cash. Hidden real estate value that will materialize over the new few quarters. High dividend yield.

ROE = 5% CoE = 8% G = 0% IV P/TBV = (ROE - G)/(CoE - G) = 5%/8% = 0.625x TBV ROE = 5% CoE = 8% G = -10% IV P/TBV = (ROE - G)/(CoE - G) = 15%/18% = 0.833x TBV It seems two negative, low ROE and negative growth, creates a positive here.

If all the AUM/AUA leave immediately and the company goes into liquidation, wont the equity holder gain access to that tangible book? On some level, revenue decline is value crystallization?

Kraken - China mieville

his money is greener than others

Thank you very much for your reply. How about the tax impact? does it occur ratably or will it be upon receipt of cash...the latter doesn't make sense to me as the cost position is still an uncertainty...

Well...not exactly the same...the company i am looking at has a finite life. But i am looking at STON as a potential short though...but the yield scares me.

I think about it like this. I count cash collected as real cash. The company can spend it or do whatever it wants with it. Then when I look at deferred revenue, I almost ignore it. While it is a liability because the future services are owed to the customer, It's not like debt where it has to be paid off with cash. Owing services and owing interest and principal are very different. For example, take Rosetta stone. It has deferred revenue from it's software and recognizes the revenues with the memberships expiring. If the company you're talking about isn't as asset light as a software company and has service contracts that require expenses, i would probably adjust for future earnings to be lower to account for the added costs required to provide the owed services. Either way, cash up front is great for the business. Yes I agree it is good because negative WC yeah yeah....but what if this is a company in liquidation. Market cap is $50m but has $100m in cash...also has $100m in deferred revenue that is has to recognize....say that $100m in deferred revenue will hit the income statement next year...and the company has a 50% EBT and 40% tax rate....dont this mean the company will have a cash outflow of $50m (expenses) and $20m (tax outflow)? So the true cash balance is actually $30m.. Am I thinking about this right? Assuming no non-cash expense of course.