(By Mani) United Rentals, Inc. (NYSE: URI) stock remains strong heading into 2013, driven by fundamentals that boast a flexible balance sheet, steady cash flow and solid pricing trends.
The equipment rental company is benefiting from industry trend that customers increasingly opting to "rent vs. buy" equipment, and it is capturing share relative to smaller competitors in an expanding industry.
United Rentals, which rents over 20,000 classes of equipment, recently highlighted that 2013-2015 should deliver about $2 billion of free cash flow (FCF), well in excess of what's needed to maintain debt/EBITDA at the low end of its target zone of 2.5x-3.5x.
The company cited its primary use of free cash flow in the near term will be to pay down debt and reduce leverage to 3x debt to EBITDA by the end of 2013. Longer-term, it will review ways of returning cash to shareholders.
"URI's clear comfort with this long-term "anticipation," and logical metric bridge to it enhanced the attractiveness of the story," Oppenheimer analyst Scott Schneeberger said in a client note.
United Rentals reiterated free cash flow guidance for 2013 in the range of $400-$500 million, consistent with its internal free cash flow projections per the S-4 plus estimated synergies for 2013.
As the company reduces debt/EBITDA to ~3x, it expects to generate excess free cash flow over coming years that should position it well for further M&A activity and incremental share buybacks.
"We anticipate URI's strong free cash flow generation, focus on debt reduction, and increasingly powerful balance sheet (with flexibility beyond debt reduction once it reaches ~3x debt/EBITDA) will make it more attractive to a long-term investors, potentially prompting the holder base to become more "owners" vs. "renters," the analyst said.
Meanwhile, the 2013 rental rate growth is anticipated to be "down a little bit" from the guided 7 percent in 2012, and seemingly conservative 2-3 percent rental rate growth was anticipated in 2014 and beyond. This is consistent with what the company considers a more sustainable long-term growth rate.
"We view these rental rate growth assumptions to be attainable considering persisting favorable secular (and potentially cyclical) drivers, efficient fleet management (utilization), superior customer service levels," Schneeberger noted.
The rental rates are expected to exceed the 2007 peak levels given the company's historically improved service and value proposition to customers.
In addition, United Rentals bridged its current return on invested capital (ROIC) of 7.4 percent to its future target of 10.1 percent, suggesting that it acknowledges investor attention to ROIC generated in the equipment rental industry not being in excess of the cost of capital
It expects to improve its ROIC by 2.7 percent over the next 2-3 years. Importantly, a core fundamental/financial goal of the company is for it to return its cost of capital over a cycle.
"This (ROIC) clearly coincides with investor desire as well," Schneeberger added.
Further, the company has several key operational strengths versus peers including leadership; broad scope of services and geographical footprint, which is unmatched in the industry. Also, the company's robust safety culture and its ability to help customers create efficiency and save costs are driving credibility/loyalty.