United Rentals (URI 12.96%) shares powered 12.4% higher through 12:45 p.m. ET on Thursday after the lessor of construction and general industrial equipment reported better-than-expected sales for the quarter — and better earnings as well.
Heading into the Q4 2023 report, Wall Street analysts forecast that United Rentals would earn $10.93 per share, adjusted for one-time items, on quarterly revenue of $3.6 billion. As it turned out, United Rentals earned $11.26 per share as revenue came in ahead of expectations at $3.7 billion.
United Rentals’ sales and earnings
Revenue climbed 13% year over year. Net income came to $10.01 per share, a smaller increase of only 9% year over year. (The $11.26 number was an adjusted number.) Furthermore, this per-share income was boosted by a decline in the number of shares outstanding; total net income grew only about 6% year over year.
So perhaps one of the first things you should notice here — albeit not something highlighted in the report — is that profit margins actually declined at United Rentals, falling 120 basis points year over year, from 19.4% to 18.2% in Q4.
Now compare this to how United Rentals performed in 2023 as a whole. Sales for the year grew 23% year over year, to $14.3 billion. Earnings were up 19% on a per-share basis ($35.28) and only 15% on a net income basis. So again, profits aren’t rising as fast as sales are, and sales growth seems to be slowing overall.
United Rentals in 2024
Looking ahead to 2024, investors should expect further slowing. United Rentals’ guidance for the new year sees revenue ranging from about $14.6 billion to about $15.2 billion, with $14.9 billion at the midpoint. That works out to only 4% year-over-year sales growth.
Management didn’t give clear guidance on profit margins or profits per se. It did, however, warn that cash flow will weaken in 2024. United Rentals expects operating cash flow to be down about $250 million year over year at $4.45 billion, plus or minus. Free cash flow should be in the neighborhood of $2.1 billion — a $200 million decline from 2023.
With United Rentals stock currently valued at $44.3 billion, that works out to a price-to-free cash flow ratio of 21 on the stock — not a great valuation if all the company can manage is 4% growth this year.
While today’s share price rally is encouraging and United Rentals handily beat the stock market last year, it may now be time to sell.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
