New United Rentals Price Target After Bottom-Line Miss

Leading up to the December quarter earnings report from United Rentals (URI) , we cautioned members that the extreme winter weather this week would be a likely guidance headwind for the company’s weakest quarter of the year.

What we didn’t see coming were the shortfall in higher margin, used equipment sales and continued margin headwinds from elevated delivery expenses tied to fleet repositioning costs. Those factors weighed on margins, driving a bottom-line miss even though revenue for the December quarter was largely in line with the $4.2 billion market consensus.

With the bottom-line miss, even though it was just over 5% relative to what the market was looking for, URI shares are following the increasingly well-worn pattern of falling under pressure. As we moved past the prime construction season several months ago, we’ve more or less been on the sidelines with URI shares, and our intention was to remain so until we moved past the current winter season.

As we’ve seen many times in the past, weather disruptions can be a real pain in the you know what, but given the size and scope of these large construction projects, they tend to result in modest delays and boil down to timing issues.

On the earnings call, United management once again shared that, based on announced and pending mega projects, backlog and other factors, it sees mid-single top-line growth for its rental business. Key end market drivers remain data center, power, healthcare and infrastructure. However, following multiple years of solid used equipment sales, the outlook for that smaller but higher margin business looks more subdued for the coming quarters. The net effect is that we will see higher operating income and adjusted EBITDA that should translate into higher EPS, but not much margin improvement.

Sweetening the bottom-line performance ahead, United shared that it will use the $350 million remaining under its existing share repurchase program, and that it will be followed by a fresh $5 billion repurchase program. Management signaled it expects to repurchase that $350 million in the current quarter, and targets an additional $1.15 billion in 2026. Given the post-earnings sell-off, we suspect United may tap that new program sooner rather than later.

In addition to the re-armed buyback program, United also said shareholders will be receiving a new dividend of $1.97 per share per quarter, which is a 10% increase over the prior quarterly dividend.

In the September quarter, those two capital return announcements would have acted to buoy the shares, but this time around, market sentiment is far less forgiving, especially given the double-digit January gain leading into Wednesday night’s results. That suggests Thursday's reaction is another overreaction.

In the current environment, we’re likely to see some price target trimming due to reset margin prospects restraining the shares at least until more construction-friendly weather emerges. We’ll play our part in that as we trim our price target to $950 from $1,000, and despite that distance from the current share price, we’ll wait in the wings for seasonal strength to emerge and with it better operating leverage.

Folks that are underweight URI shares, and are a patient lot, picking up a few URI shares here and there, is in keeping with our Two rating.

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At the time of publication, TheStreet Pro Portfolio was long URI.