The share price of United Rentals, Inc. (URI) went up 1.1% as the company reported a 35% year-over-year increase in its third-quarter 2014 adjusted earnings to $2.20 per share on Oct 15. The results beat the Zacks Consensus Estimate of $2.05, resulting in an earnings surprise of 7%.
GAAP earnings (including RSC merger related costs, restructuring and asset impairment charges and loss on repurchase/redemption of debt securities) came in at $1.84 per share, compared with the prior-year quarter earnings of $1.35 per share.
Operational Update
Total revenue improved 18% year over year to $1.544 billion in the quarter, beating the Zacks Consensus Estimate of $1.501 billion. The year-over-year rise was mainly due to growth in equipment rentals (16%), sales of new equipment (45%), sales of rental equipment (37%), and services and other revenues (26%).
Cost of sales increased 15% to $856 million from $747 million in the year-ago quarter. Gross profit improved 22% year over year to $688 million. Consequently, gross margin expanded 160 basis points (bps) to 44.6% in the quarter.
Selling, general and administrative expenses went up 16% year over year to $194 million. Adjusted operating profit rose 24% to $494 million, while operating margin increased 170 bps to 32% in the quarter.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the reported quarter improved 19% to $761 million from $642 million in the year-ago quarter. Adjusted EBITDA margin was a record 49.3%, rising 30 bps from the year-ago quarter.
Time utilization increased 70 bps year over year to 71.5%. The size of the rental fleet was $8.61 billion as of the quarter-end, compared with $7.73 billion at 2013-end.
Segmental Performance
In the reported quarter, revenues in the General Rentals segment increased 8.6% year over year to $1,127 million. Gross profit for the segment increased 11.5% to $496 million from $445 million in the year-ago quarter.
The Trench Safety, Power & HVAC segment’s revenues climbed 88% to $188 million from $100 million in the year-ago quarter. Gross profit for the segment improved 98% to $103 million from $52 million in the prior-year quarter.
Financial Update
Cash and cash equivalents were $168 million as of Sep 30, 2014, compared with $175 million as of Dec 31, 2013. Long-term debt was $7.5 billion as of Sep 30, 2014 versus $6.6 billion as of Dec 31, 2013. Cash flow from operating activities was $412 million in the reported quarter, up from $237 million in the prior-year quarter. For the quarter, free cash flow was $72 million, compared with a usage of $161 million in the prior-year quarter.
In Oct 2013, United Rentals’ board of directors had approved a $500 million share repurchase program. Under this program, during the first nine months of 2014, the company repurchased common stock worth $380 million. United Rentals plans to complete the program by Dec 2014.
Outlook
United Rentals maintained its revenue guidance in the range of $5.55 billion to $5.65 billion for fiscal 2014. Adjusted EBITDA guidance for the full year is projected in the range of $2.65–$2.70 billion. The company expects an increase in rental rates of approximately 4.5% year over year and time utilization of around 68.5%.
Net rental capital expenditures are expected at approximately $1.2 billion, after gross purchases of approximately $1.7 billion. The company anticipates free cash flow in the range of $475 million to $525 million.
Our Take
United Rentals will benefit from the acquisition of National Pump. The deal marks United Rentals' venture into the pump rental sector, catapulting it to the position of the second largest provider of pump rentals in North America. The sector looks promising given the rising demand from energy and petrochemical companies that are capitalizing on the booming shale gas market in the U.S. The deal is expected to be accretive to United Rentals’ free cash flow and earnings per share in 2014.
United Rentals will also gain from the implementation of growth strategies, higher rental rates, free cash flow generation, returning cash to shareholders and integrating acquisitions. Notably, the company will continue to focus on reducing the cycle time for renting equipment, improving accuracy, service quality and efficiency and cost control, which will lead to an increase in gross margin. The company is also poised to benefit from a rebound in non-residential construction.
Greenwich, CT.-based United Rentals is the largest equipment rental company in the world, with an integrated network of 832 rentals. The company offers leases on about 3,100 classes of equipment with total original cost of $7.73 billion.
United Rentals currently carries a Zacks Rank #3 (Hold). Some other stocks worth considering in the sector include PGT, Inc. (PGTI), UCP, Inc. (UCP) and Sterling Construction Co. Inc. (STRL). While PGT sports a Zacks Rank #1 (Strong Buy), UCP and Sterling Construction hold a Zacks Rank #2 (Buy).
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