United Rentals, Inc. (URI) Results Don’t Bode Well for Equipment Manufacturers

The recent results of United Rentals, Inc. (NYSE:URI) don’t bode well for the results of equipment manufactures such as Terex Corporation (NYSE:TEX) or Manitowoc Company, Inc. (NYSE:MTW).

United Rentals, Inc. (NYSE:URI) claims the largest equipment rental company in the world, operating 824 rental locations in North America.

The company reported results that again smashed estimates, sending the stock soaring 10% higher for the initial day of trading after the report. The limited revenue growth doesn’t bode as well for the equipment manufacturers.

Reviewing the results

United Rentals, Inc. (NYSE:URI) reported adjusted earnings of $1.12 that beat estimates by $0.11 and easily smashed the earnings of $0.66 last year. After reviewing the history, the company tends to beat earnings estimates in this range over the last year, so maybe the ‘surprise’ isn’t that big of a shock to investors that follow this stock.

The company only reported pro-forma rental revenue gains of 4.7% and 6.2% on owned equipment based on a mix of volume increases and rate hikes. Note that some media outlets are reporting 20% revenue growth, but those numbers come from the additional revenue due to the purchase of RSC back during Q2 last year.

United achieved record time utilization of 67.9% and expects to reach 68% for the year. Based on the utilization records, the full year adjusted EBITDA should reach $2.3 billion. At a market value of only $5.3 billion, the stock trades at an interesting multiple to EBITDA.

Fleet size

More important for equipment manufacturers such as Terex Corporation (NYSE:TEX) and Manitowoc Company, Inc. (NYSE:MTW) are the sizes of the fleet. The company spent $730 million on fleet purchases in Q2 to reach a fleet size of $7.70 billion at June 30 from $7.23 billion on December 31, 2012. The age of the fleet dropped to 44.5 months from 47.2 months back on December 31.

The recent jump in fleet size, which has reduced the fleet age combined with limited revenue growth doesn’t suggest fleet size will increase much in the future. The time utilization level does elicit some requirements for increasing fleet size, but all signs exist that United is more efficient and focused on profits to allow that number to force equipment purchases.

Valuation

Anybody following Terex Corporation (NYSE:TEX) knows that the company recently warned, primarily due to weakness in Europe and international locations. North America has been an area of strength, and the lackluster revenue results for United Rentals, Inc. (NYSE:URI) suggests the area of strength might not last. Remember that United is squeezing more profits out of limited growth, meaning the company might also be obtaining favorable pricing from equipment manufacturers such as Terex.