Investors don't need to just invest in flashy companies that make the headlines to beat the market. Names like Nvidia and Tesla may be exciting to follow, but a quiet, industrial stock like United Rentals (URI -1.32%) can provide market-beating returns, too.
Shares of the world's largest equipment rental company have trounced the S&P 500 index in 2024 and should have more room to run heading into 2025. Even after soundly beating the S&P 500 with a 40% total return in 2024, United Rentals looks to have tailwinds heading into 2025.
URI Total Return Level data by YCharts
The time is now for infrastructure
United Rentals is the industry leader with more than 1,600 global branch locations. It concentrates in North America with a diversified customer base including companies in the construction, industrial, energy, and mining sectors. The company also has a highly profitable specialty solutions segment that has been growing at a 24% annual rate over the past decade. That represents about one-third of annual revenue.
Shares have soared this year as United Rentals' business continues to grow. Sales from equipment rentals, which make up 85% of total revenue, increased 7.4% in the first nine months of 2024 versus last year. Diluted earnings per share jumped nearly 12%, though. The company has rewarded shareholders by paying out 10% more in dividends, too.
United Rentals CEO Matthew Flannery believes the company is well situated looking forward as well. In the company's third-quarter earnings release, he stated, "Longer-term, we remain optimistic on the multiple secular tailwinds we see, particularly across large projects."
One of those tailwinds is ongoing infrastructure spending authorized by the Bipartisan Infrastructure Law signed in 2021. That law provides $550 billion through 2026 for investments in roads, bridges, water infrastructure, and other U.S. infrastructure. And it's not just federal money that will boost projects in which United Rentals will participate. Considering all that, it's not hard to see why the stock has soared this year.
No playing politics
The infrastructure law is certainly a positive catalyst for United Rentals' business, though. And while investors in all sectors are trying to predict what changes the incoming administration might seek, clawing back funds dedicated to infrastructure investments isn't likely to be one of them, in my opinion.
Some may not recall, but President-elect Trump himself placed infrastructure at the top of his platform when he was first elected in 2016. So it seems likely that work to update transportation routes and modernize ports, airports, and other public structures will continue.
The consensus is that the overall economy will also keep growing in 2025, which will continue to encourage private investment. This year, gross domestic product (GDP) grew at a rate of 3% in the second quarter and 2.8% in the third quarter. The intergovernmental Organization for Economic Co-operation and Development (OECD) projects 2.8% GDP growth in the U.S. in 2025. While consensus estimates among economists call for a slower rate, Goldman Sachs thinks the economy will grow at a 2.5% pace. Any growth in that range will be beneficial.
United Rentals is North America's market share leader in its space and has end-market exposure beyond just infrastructure. GDP growth will spur continued investments by businesses that will help United Rentals continue on its growth path. Projects in semiconductor manufacturing, data centers, electric vehicle and battery plants, and liquefied natural gas (LNG) and renewable energy investments will all contribute.
More room to run
Investors should also be attracted to the company's strong cash flow. It generated nearly $10 billion in free cash flow over the last five years. It allocates capital by investing in organic growth and looking for strategic opportunities providing appropriate returns. It also pays a dividend as noted previously and has reduced its share count by more than 40% with share repurchases since 2012.
While the 2024 gains have the company's price-to-earnings (P/E) ratio at slightly over 20, that's still well below its last cyclical peak of 27.4. Considering the underlying growth prospects for United Rentals, that's a reasonable valuation that leaves room for the stock to keep running in 2025.
