Here’s the not-so-secret formula that tends to outperform the stock market:
- Identify stocks trading at or near a 52-week high;
- Identify the subset of the high-flyers with a big recent upside earnings surprise; and
Studies have shown that 52-week-highs and earnings momentum are excellent predictors of continued outperformance for months, and frequently years, to come. Why? Because investors often don’t fully grasp the extent of the good news right away, and tend to underestimate its implications for the future. Many also hate to pay up for a stock, figuring that what goes up must come down when what goes up frequently keeps going higher.
United Rentals (NYSE: URI) is a recent outperformer that meets both criteria, thanks to several favorable long-term trends.
The largest supplier of construction, aerial and industrial equipment rentals has benefited from customers’ growing preference for renting over buying, given uncertain demand and capital constraints amid a credit crunch.
It’s also primed to profit from the US industrial revival, after recently acquiring a large competitor with that focus.
In the longer run, United Rentals would be a prime beneficiary of accelerated infrastructure upgrades by utilities and the eventual revival of commercial construction that still accounts for nearly half its business.
The company had a banner year in 2012. It closed its purchase of rival RSC holdings, which doubled URI’s exposure to the promising industrial segment at a stroke, and began to realize merger synergies. And as demand for its excavators, forklifts and booms increased it successfully raised rental rates and prices on the used equipment it sells, boosting revenue 13 percent.
URI has conservatively forecast growth to stay steady at 7 percent this year; its profit growth accelerated in the fourth quarter, a trend that should continue.
For the fourth-quarter of fiscal 2012, URI reported earnings per share (EPS) of $1.27 excluding items, well above Wall Street’s consensus estimate for $1.01 in EPS. In its annual outlook for 2013, the company said adjusted earnings before interest, taxes, depreciation, amortization and other special items should increase at least 27 percent over last year’s total, which included only eight months of profits from the acquired company.
In any case, URI expects its rental rates to rise another 4.5 percent this year, and for capacity utilization to rise slightly even as it grows its equipment fleet. That has analysts projecting EPS of $4.66 for this year, for a forward price-to-earnings (P/E) ratio of just 11. Not bad for a company those same analysts expect to boost EPS by another 27 percent in 2014.
That would likely require a meaningful recovery in commercial construction, but the company believes that one is coming. “Private non-residential construction, which accounts for half of our business, is projected to grow about 6 percent in the US in 2013, with accelerated growth in 2014,” Chief Executive Mike Kneeland told investors on the most recent earnings call. “And we think these are all reasonable forecasts and are supported by our own customer surveys as well as surveys from other sources that serve in the same markets.”
On the other hand, Kneeland noted that “most of the market momentum in 2013 will come back in the back half of the year.”
URI figures to suffer meaningfully should austerity or other shocks derail the domestic economic recovery. This is a company with a huge stake in spending on public and private infrastructure. Under a different leadership in 2003, the company paid to send two congressional aides to a World Series game in hopes of winning more government business.
These days, though, the government needs merely not to depress the private economy for URI to thrive. Its growth areas are in the energy and power industries, HVAC and tool rentals.
The stock is up a hefty 65 percent since the current rally began in mid-October, but so many things looked different back then. After a bit of volatility after the recent earnings release, the bid has continued to grind higher.
If the current earnings estimates hold up, shares remain inexpensive. United Rentals thrived in last year’s environment and could win big if 2014 proves much better.
Igor Greenwald is an investment analyst with The Energy Strategist.