Is United Rentals, Inc. (URI) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does United Rentals, Inc. (NYSE:URI) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell United Rentals, Inc. (NYSE:URI)’ story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at United Rentals, Inc. (NYSE:URI)’ key statistics:

URI Total Return Price data by YCharts

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	112.9%	Pass
Improving profit margin	223.5%	Pass
Free cash flow growth > Net income growth	(313.7%) vs. 362.7%	Fail
Improving EPS	250.4%	Pass
Stock growth (+ 15%) < EPS growth	442.3% vs. 250.4%	Fail

Source: YCharts. * Period begins at end of Q1 2010.

URI Return on Equity data by YCharts

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(94.4%)	Fail
Declining debt to equity	107.6%	Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here and where we’re going
United Rentals, Inc. (NYSE:URI) doesn’t look like it’s earning its gains today, with only three out of seven possible passing grades. A big source of that weakness is the company’s falling free cash flow, which has diverged markedly from its net income over the past two years. In addition to this, return on equity has dipped significantly, thanks to an increase of over 50% in the share count since the start of our tracking period. Will United Rentals be able to turn this weakness around and rebound, or is it going to get returned with a few more dings than it left the lot with? Let’s dig a little deeper.

United Rentals, Inc. (NYSE:URI) has over 830 rental locations in the U.S. and Canada, and controls 13% of the North American market for construction and industrial equipment rentals. The company has found itself entangled in scandals in the past, the most notorious of which involved some shady lobbying practices that occurred around a decade ago. That ought to be water under the bridge by now, but it’s still something to keep in the back of your mind. The company also has a working capital deficit, and it seems to solve its debt problems via the issuance of new shares. That’s good for avoiding debt overhangs, but it doesn’t do long-term shareholders any favors unless United Rentals, Inc. (NYSE:URI) can keep powering earnings higher.