United Rentals Inc (URI, Financial) witnessed a daily gain of 4.3%, and a robust 3-month gain of 41.03%. The company reported an impressive Earnings Per Share (EPS) of 32.86. The question that arises is whether the stock is fairly valued at its current price. To answer this, we delve into a comprehensive valuation analysis. We invite you to explore our findings as we unravel the intrinsic value of United Rentals.
Company Overview
United Rentals, the world's largest equipment rental company, primarily operates in the United States and Canada. It holds approximately 17% of market share in a highly fragmented industry. The company serves three end markets: general industrial, commercial construction, and residential construction. Since its public inception in 1997, United Rentals has grown organically and through numerous acquisitions, expanding its fleet size to $19.6 billion. It offers a range of specialty equipment and items for indefinite rental periods.
The company's stock price and the GF Value, an estimation of fair value, will be compared to provide a deeper understanding of the company's value. This will pave the way for a more profound exploration of the company's financial health and performance.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally trade. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) at which the stock has traded.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value at which the stock should trade. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus' valuation method, United Rentals (URI, Financial) appears to be fairly valued. The stock's fair value is estimated using three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. At its current price of $485.86 per share, United Rentals has a market cap of $33.20 billion and the stock appears to be fairly valued.
Given that United Rentals is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength Analysis
Assessing the financial strength of a company before investing in its stock is crucial. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage provide a good understanding of a company's financial strength. United Rentals has a cash-to-debt ratio of 0.02, which is worse than 95.76% of companies in the Business Services industry. The overall financial strength of United Rentals is 4 out of 10, indicating that its financial strength is poor.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. United Rentals has been profitable 10 times over the past 10 years. Over the past twelve months, the company had a revenue of $13.20 billion and Earnings Per Share (EPS) of $32.86. Its operating margin is 27.51%, which ranks better than 92.99% of companies in the Business Services industry. GuruFocus ranks the profitability of United Rentals at 10 out of 10, indicating strong profitability.
Growth is one of the most important factors in the valuation of a company. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of United Rentals is 10.9%, which ranks better than 70.22% of companies in the Business Services industry. The 3-year average EBITDA growth is 12.5%, which ranks better than 55.81% of companies in the Business Services industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, United Rentals's return on invested capital is 12.6, and its cost of capital is 11.33.
Conclusion
Overall, United Rentals (URI, Financial) stock appears to be fairly valued. The company's financial condition is poor, but its profitability is strong. Its growth ranks better than 55.81% of companies in the Business Services industry. To learn more about United Rentals stock, you can check out its 30-Year Financials here.
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