BPCAP Posted August 19, 2015 Share Posted August 19, 2015 Anyone have a strong opinion on URI one way or another. The share price has been down significantly (to management's chagrin especially since they bought a ton of stock 50% higher). Management's heart seems to be in the right place regarding shareholder-orientation even though their capital allocation has been mixed (some expensive share buybacks and some poor acquisitions in the past). I'm not sure their skill matches their intensions. They increased exposure to oil and gas at the wrong time, too. But the company seems moaty. Their premise has value for the customer: rent instead of own, cost, scale, asset management and analytics, other services. Debt is largely longer term and being refinanced here and there. 7-8%+ coupons are going down to the 5% range. Price is getting more reasonable and seems to warrant further investigation and watching, I think. However, I can't escape the thought that there's something big right in front of me I can't see. Is something else hitting the stock besides economic worries, valuation, oil & gas exposure, capital allocation? Thanks http://www.unitedrentals.com/pdfs/investor-presentations/q2-2015_company-industry-background-update.pdf Link to comment Share on other sites More sharing options...
FCharlie Posted February 13, 2016 Share Posted February 13, 2016 This just popped back on my radar. The price is down over 60% since August. Price to trailing free cash flow is about 4. Price to forward free cash flow is about 4 as well, but the year just started. I think the fear around this company was wildly overblown in the last recession of 2009. The stock went all the way down to about one times free cash flow back then. I'm not expecting, but I'm hoping we have a similar situation this time because back then the stock went from about $4.00 to over $100.00 during the next five years. When times are hard, this company essentially shuts down cap ex and becomes a free cash flow machine. They are planning on using all of their almost $1 billion of free cash flow next year for share repurchase and debt repurchase. I'm going to do some catching up on this one, as I stopped paying attention a few years ago. Would be quite impressive to own a company that repurchases 20% of shares outstanding and retires debt at the same time. Link to comment Share on other sites More sharing options...
WeiChiLoh Posted February 13, 2016 Share Posted February 13, 2016 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. Link to comment Share on other sites More sharing options...
WeiChiLoh Posted February 14, 2016 Share Posted February 14, 2016 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. Link to comment Share on other sites More sharing options...
BG2008 Posted February 14, 2016 Share Posted February 14, 2016 Any mention of United Rental should involve a dialogue of Bradley Jacobs who is currently rolling up the freight forwarding industry via XPO Link to comment Share on other sites More sharing options...
FCharlie Posted February 21, 2016 Share Posted February 21, 2016 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. 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. Link to comment Share on other sites More sharing options...
WeiChiLoh Posted February 22, 2016 Share Posted February 22, 2016 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. 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. Link to comment Share on other sites More sharing options...
Nnejad Posted February 22, 2016 Share Posted February 22, 2016 Just for kicks - what do you think normalized margins are? Link to comment Share on other sites More sharing options...
FCharlie Posted February 23, 2016 Share Posted February 23, 2016 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. Let's also not forget that URI acquired RSC in 2012 and at the time projected $230 million of synergies. It may not be fair to assume that free cash flow will revert back to 2008 levels. Prior to the RSC acquisition, free cash flow averaged about $300 million annually. Post RSC acquisition, free cash flow has averaged about $650 million. I'm not saying earnings won't decline in a down cycle, I'm just saying it's probably not an apples to apples comparison anymore. Link to comment Share on other sites More sharing options...
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