Qualivian Investment: United Rentals ($URI) Investment Case
Introduction In their Q2 2024 investor letter, Qualivian Investment Partners presents United Rentals (URI) as a Quality Compounder, highlighting it as a market leader in North American equipment rental with compelling structural advantages. The firm emphasizes URI’s position in a consolidating industry and its potential for sustained growth despite market perception as a purely cyclical business.
Investment Highlight: United Rentals ($URI)
Business Overview
- Market leader in North American equipment rental with 15% market share
- Serves three main markets: industrial/non-construction (49%), commercial construction (46%), and residential construction (5%)
- Simple, understandable business model with low disruption risk
- Part of emerging oligopoly alongside Sunbelt (11%) and Herc (4%)
Competitive Advantages
- Strong economies of scale and scope driving market consolidation
- Superior branch network coverage and density
- “One-Stop-Shopping” capability for larger accounts
- Significant purchasing power with equipment manufacturers
- Advanced technological platforms for equipment management and customer service
- Better operating margins compared to industry peers
Performance Analysis
- Growth Metrics:
- 12% CAGR in revenues and EBITDA over past 5 years
- 25% CAGR in EPS over past 5 years
- Conservative projected low to mid-teens EPS growth
- Growth Components:
- 6-8% organic top-line growth
- 20-40 bps annual operating margin expansion
- 1-3% additional growth from acquisitions
- 1-3% contribution from share repurchases
Market Dynamics and Opportunities
- Increasing equipment rental penetration (projected 55-60% to 65% over 5 years)
- Significant tailwinds from government infrastructure spending
- $550B Infrastructure Bill
- $1T+ Inflation Reduction Act
- $200B CHIPS and Science Act
- Commercial investments in LNG and EV/battery sectors
Capital Allocation Strategy
- Disciplined M&A approach with high teens to low 20% IRR requirements
- Strong focus on strategic acquisitions in new product categories
- 20% reduction in diluted share count over past 5 years
- Recently initiated dividend program in Q1 2023
- Current leverage of 1.6X Debt/EBITDA (below 2-3X target)
Valuation
- Trading at 15.1X NTM P/E
- 0.7X NTM relative P/E to market
- 4.4% FCF yield on 2024 estimates
- Expected return of 14.4-19.4% per year over next 3 years
Market Perception and Opportunities
- Currently priced as a cyclical business
- Market underappreciates decreasing cyclicality
- Strong potential for multiple expansion as market recognizes structural improvements
Risks
- Exposure to construction industry cycles
- Economic recession impact potential
- Competitive pressure in consolidating market
Qualivian Investment Partners views URI as a compelling investment opportunity, citing its market leadership, decreasing cyclicality, and strong capital allocation strategy as key factors. They believe the market currently undervalues URI’s structural advantages and its potential for sustained growth in an increasingly consolidated industry.
Click here for the full letter.
Disclaimer: The information provided in this blog post is for informational and educational purposes only and does not constitute financial, investment, or other professional advice. The content is based on a third-party investor letter and does not represent an endorsement, recommendation, or solicitation to buy or sell any particular security or investment product mentioned.
Investing involves risk, including the potential loss of principal. Past performance is not indicative
