As we approach the midpoint of 2024, the industrial sector is witnessing a resurgence in activity, driven by the boom in construction amid rising demand. The American Rental Association (ARA) projects 7.1% revenue growth for the construction rental equipment segment in 2024, following an 11.3% jump in 2023. With an expected surge in infrastructure spending and residential construction projects driving demand, companies are expanding to meet customer needs in key markets.
Within the group, United Rentals (URI) stands out as one top investment pick. Analysts at JPMorgan recently gave URI an "Overweight" rating with a $780 price target, suggesting potential upside of more than 24% from current levels. In naming URI its top U.S. construction play, JPMorgan (JPM) says the company's scale is a major bonus that positions United Rentals for above-industry returns, with benefits like “increased bargaining power with suppliers, network effects, high switching costs for customers, and barriers to entry for new, smaller competitors.”
Here's what else you need to know about this passive income pick.
Market Performance and Valuation: A Closer Look at United Rentals Stock
United Rentals (URI) is one of the biggest players in the equipment rental game, offering a wide range of rental services to construction, industrial, and residential customers. Their business model is all about providing flexible, cost-effective equipment solutions, making them an industry leader.
URI stock is up over 62% from its 52-week low of $387.01, set last October, and the shares have gained 9.5% on a YTD basis.
URI's current forward price/earnings ratio of 14.18 is a discount to its industrial peer group median of 18.8x - but it's a little richer than the stock's historical average of 11.82x.
On the dividend side, United Rentals is a newer entry to the field of income providers. They started paying dividends in the first quarter of 2023, and increased the payout to $1.63 per share in the first quarter of 2024. The annualized dividend of $6.52 translates to a forward yield of 1.04%.
With a modest payout ratio around 14%, the dividend is well-covered by earnings - and URI appears to be preserving plenty of capital for growth initiatives, too.
In their recent Q1 2024 earnings report, United Rentals posted total revenue of $3.49 billion, which beat estimates for $3.41 billion. Net income arrived at $542 million, with adjusted per-share earnings topping consensus forecasts at $9.15.
Looking ahead, Wall Street is targeting steady 7% EPS growth for this year and next.
Growth Drivers Powering United Rentals
United Rentals' strong fundamentals are driven by smart acquisitions and innovative products that set the company up for long-term growth. The recent $1.1 billion cash acquisition of Yak Access, Yak Mat, and New South Access & Environmental Solutions boosts URI's matting solutions and enhances its one-stop-shop value proposition.
Per management, Yak should have a positive impact on 2024 results, providing total revenue of approximately $300 million, adjusted EBITDA of approximately $140 million, net cash from operating activities of approximately $150 million, and free cash flow of approximately $50 million. The acquisition, completed in March, is also projected to add approximately $100 million of gross rental purchases.
Additionally, United Rentals' new battery energy systems for tower cranes in North America show their commitment to sustainable solutions. Developed with Termaco, these systems help contractors cut fuel use, emissions, and downtime, aligning with environmental goals while providing great value.
Analysts Insights on URI's Potential
Reflecting JPMorgan's bullish tone, United Rentals has a consensus "Moderate Buy" rating from Wall Street analysts. Out of 19 analysts, 8 have given a "Strong Buy," 7 suggest a "Hold," and 4 have a "Strong Sell."
The average price target is $648.94, implying a potential upside of around 3.4% from current levels. The Street-high target of $796 indicates an expected premium of about 26.7%.
Along with JPMorgan, several other top analysts have also recently weighed in on URI. Goldman Sachs' (GS) Jerry Revich reiterated a "Buy" rating and raised the price target from $718 to $790, while Truist initiated coverage with a "Buy" rating and a $793 price target, citing URI's strong market position and growth prospects.
Why United Rentals is a Must-Have for Your Portfolio
All things considered, United Rentals (URI) looks like a solid bet for investors eyeing the booming industrial sector. With overall bullish analyst ratings, a high-conviction thumbs-up from JPMorgan, and a freshly boosted full-year forecast, URI looks well-positioned to leverage surging demand in construction and infrastructure. Their smart acquisitions and innovative products only add to their growth potential, while a steady dividend stream sweetens the deal for income seekers.
So, if you're looking for an industrial stock with promising upside potential and a steady income stream, United Rentals might just be the ticket.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
