Shares of equipment-rental company United Rentals (URI -1.32%) jumped 17.1% during July, according to data provided by S&P Global Market Intelligence. The company reported its financial results for the second quarter of 2024 on July 24, impressing investors. This provided the fuel the stock needed to rocket higher.
United Rentals is the largest equipment-rental company in the world, providing equipment for many different use cases and customer bases. It predominately does business in the U.S., and business has been quite good. The company's revenue in the first half of 2024 was up 6% from the first half of 2023. But its profits are really shining with a net-profit margin of 16% right now.
Prominent analysts were quick to praise United Rentals after its Q2 report. For example, Truist analyst Jamie Cook raised her price target for the company from $785 per share to $873 per share, according to The Fly. The analyst reportedly was impressed with Q2 results and cited the resiliency of its business model.
Management for United Rentals expects that resiliency to carry the business higher in the second half of the year. The company had forecasted full-year revenue of $14.95 billion to $15.45 billion in revenue. But now it expects $15.05 billion to $15.35 billion, which is a little higher on the low end of guidance.
Tell me more about this resilient business model
I agree with Cook when it comes to United Rentals' business model. The company buys equipment and rents it out. As long as the rental economics makes the most sense, it will keep maintaining the equipment. But if market dynamics push the value of used equipment high enough, it will sell at favorable prices.
The net result is that United Rentals is a free-cash-flow machine. And with its cash flow, it will repurchase shares unless it finds a compelling growth-via-acquisition opportunity.
URI Average Diluted Shares Outstanding (Quarterly) data by YCharts.
As this chart illustrates, United Rentals has been steadily going about this for a long time. Free cash flow can be lumpy. But the share count is systematically decreasing, and the stock price keeps rising, hitting an all-time high in July.
A word of caution
United Rentals stock trades at over 20 times its free-cash-flow expectations for 2024, which for this company is high. Investors should keep in mind that this is a slow-growth business, so share repurchases are a big part of the investment thesis. And when shares trade at higher-than-usual valuations, the repurchases don't have as much positive impact.
I believe returns will be modest over the near term because of its valuation. So shareholders should temper expectations. That said, the effectiveness of its business model has worked for a long time so I expect investors with a long-enough time horizon will still make money with United Rentals stock.
