AGB 2023.4 - United Rentals (URI)
Consolidating a Cyclical Market
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United Rentals
United Rentals is the largest equipment rental company in the world with a fleet of over 1M rental units in 4.6k different equipment classes offered at 1.5k locations. The company purchases construction and industrial equipment from its suppliers and rents the equipment to its customers for a fee. United maintains and services the equipment over its useful life cycle and then sells the equipment, usually to its customers, at the optimal time. Most of the company’s operations are in the U.S. and Canada (96% of locations), with a much smaller presence in Europe, Australia and New Zealand.
United has grown to be the industry leader through a series of acquisitions. The company was founded in 1997 and United quickly became the industry leader in just 13 months. Even as the industry has consolidated over time, the market still remains very fragmented. In 2010, United commanded 5% market share, followed by Sunbelt Rentals (subsidiary of Ashtead Group) at 4%, RSC (acquired by United in 2012) at 3% and Herc at 3%. Today, United commands 17% of the market with Sunbelt 13% and Herc 4%. Said another way, in 2010 the top 10 rental companies in the U.S. commanded 20% of the market, and that number increased to over 40% by 2021.
United’s main customers are construction and industrial companies. These customers require equipment for the construction and renovation of residential and commercial buildings, warehouses, manufacturing plants, office parks, etc. In 2022, United’s largest end markets were non-residential construction (47% of revenues), infrastructure, power, and oil & gas. Macro drivers of the rental market include construction activity (in particular non-residential spending for United) and infrastructure spending. United’s organic revenue growth tend to lead non-residential spending growth by a year.
The business dynamic between rental companies and their customers is interesting because customers typically own their own equipment and will also rent equipment for their jobs. The main reason customers will elect to rent equipment is because it’s more economical and convenient. Customers don’t have to worry about maintaining high equipment utilization (that falls onto the rental company), storage costs or performing service/maintenance. Customers also get access to a wide selection of equipment for different job types and can easily change the amount of equipment depending on future demand.
For an rental company to be successful, the name of the game is returns on capital. And a decent proxy for that is dollar utilization, which is a measure of revenue per year/original cost of equipment. This metric depends on how much time the equipment is rented for (time utilization) and how much revenue it generates per unit of time (rate). And it’s a balance of the two, especially when looking at the entire portfolio of equipment offered to customers, that leads to high dollar utilization. Here is Dale Asplund, EVP of Business Services talking about the balance at the company’s 2018 Investor Day.
“If I wanted to chase rate and only go after rate, I should buy only telehandlers and push that rate as hard as I can. It will lower my returns. It is the wrong decision. Rate is important but it's only part of the story. What about time? Time utilization is critical; I agree. Putting stuff on rent is critical. But there again, do I go chase more telehandlers because I can put them out at 81% of the time and give up those higher-return assets like skid steers that we know we can put on rent? It's a balance. Rate is important, time is important, but it's a balance that drives us to profitable growth and optimizing returns. These numbers are at the category level. If you imagine what this would look like when we aggregate all of our fleet together across all 1,200 markets to a single number and what the danger in that one single number could be for both rate and time.”
Different classes of equipment have varying time and dollar utilizations. For example, forklifts have a high time utilization at 72.8% (from Q4 2018 earnings presentation) but a below average dollar utilization at 38.6%. Company averages were 68.8% and 44% for 2018. Earth and moving equipment like excavators have below average time utilization at 64%, but better dollar utilization at 43.2%. And trench safety equipment, which classifies as specialty equipment, offers a lower time utilization at 59.3% but a much higher dollar utilization at 53.3%.
The types of rental equipment can be segregated into two categories. The first is general rentals (or “gen rents”). This is excavators, bulldozers, lifts, and other general construction equipment. Gen rents made up 66% of revenues for United in 2022. The second is specialty rentals like trench safety, HVAC, fluid solutions, portable storage, light equipment and tools. This made up 34% of revenues in 2022.
The company, as well as other players in the industry, recognized that specialty provides much higher dollar utilization and thus higher returns on capital than gen rent. This is due to higher average rates for specialty vs. general equipment, likely because of lower rental availability. The rent/own ratio of specialty is just 20%/80% vs. 60%/40% for gen rent. This means that there are fewer choices when customers are looking to rent specific specialty equipment and because of that, the rental company can charge more.
United’s specialty segment has increased at a compounded annual growth rate of 16.2% (including M&A) over the past 8 years. The gen rents segment has increased at a CAGR of 5.5% during the same time period. This is compared the overall market growth of 4.4%. Specialty has increased to 27% of rental equipment revenue in 2022 for United up from 7% in 2012. Specialty locations make up almost 30% of total locations at over 400.
The company hasn’t recently given out long-term growth targets. Perhaps they will give out targets at their upcoming Investor Day in May of 2023. That’s likely due to the cyclical nature of the industry. However, United does have a target leverage range of 2x-3x. United finished 2022 with a net debt/EBITDA of 2.1x.