VIC — Mick McGuire (Marcato Capital)

High Margin Rentals from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 17, 2013

Mick Mcguire’s title is “Don’t buy this Recovery,” but he started out by profiling a company that is a pure play on North American construction — but it’s commercial and industrial construction, not residential. There has not yet been much recovery in commercial construction, but he thinks it’s about to begin.

His pick is United Rentals (URI)

Cyclical trends are positive, secular trends provide additional tailwind, a highly strategic merger creates the industry’s only scale player, and they have a favorable capital structure and an attractive valuation.

This is the biggest US equipment rental firm, they rent mostly the big, heavy industrial equipment like backhoes, aerial work platforms, etc.

Cyclical trends — their revenue growth tends to lag GDP growth. Usually residential construction leads, then commercial construction and URI revenue lag. Their revenues do correlate pretty well with overall construction, not just residential. Construction unemployment is also a driver, it has improved but there is more to go to get to “normal” levels.

And housing starts lead commercial construction increases by two or three quarters — there needs to be a lot more housing starts, it has rebounded but it hasn’t grown to anywhere near historical and replacement levels yet it’s expected to return to historical levels eventually.

And he says there’s also a secular shift toward more renting and less owning in heavy equipment, which creates growth even if commercial construction itself is not growing as fast. They poll their customers, and they’ve never seen such strong demand for equipment into the future — so that reinforces the potential.

The benefits of renting are clear — similar to the benefits of temporary staffing versus increasing permanent employees that Marcato talked about two years ago. By renting you conserve capital, reduce down time, save on storage and control inventory, eliminate disposal costs, get more appropriate equipment, outsource maintenance, and simplify costs and billing. Rentals are now over 50%, having been just 5% in 1993, and it’s continuing as the business continues to consolidate — a big national rental service can do a much better job for customers. Rentals are 60-65% in Europe and Australia, 80% in Japan and the UK, so there’s still room for growth.

He showed a buy vs. rent analysis that strongly favors renting — breakevens for purchases imply that you have very, very high utilization, and that’s not often the case for all equipment.

Their ...

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