On Wednesday, United Rentals (URI) stock fell 6% in after-hours trading The company’s second-quarter earnings beat the estimates. However, United Rentals lowered the revenue outlook for fiscal 2019. The company said that its second-quarter adjusted EPS rose 23.1% YoY (year-over-year) to $4.74. The second-quarter earnings beat analysts’ estimate of $4.46 per share. Higher revenues and increased rental rates mainly drove the company’s second-quarter profits.

United Rentals Beat Q2 Earnings Estimates, Stock Fell 6%

United Rentals’ second-quarter revenues of $2.29 billion beat analysts’ estimate of $2.27 billion. The second-quarter revenues rose 21.1% YoY due to the Equipment Rentals segment’s strong performance.

The Equipment Rentals segment accounted for 86% of United Rentals’ second-quarter revenues. The segment’s sales grew 20.2% YoY to $1.96 billion due to incremental revenues from the BlueLine and BakerCorp acquisitions. Higher volumes and increased rental rates also supported the overall revenue growth. United Rentals registered volume and rental rate growth in the past six quarters. We think that the improving US economy should continue to drive the volume and rental rates higher.

United Rentals’ second-quarter adjusted EBITDA has risen 18.3% YoY to $1.07 billion. However, the adjusted EBITDA margin contracted by 110 basis points to 46.9% due to the negative impact of acquisitions made in 2018.

Acquisitions drove United Rentals’ revenues 

Acquisitions are one of United Rentals’ key business strategies to expand its geographic reach and product portfolio. The approach helped the company bring in incremental revenues for its Equipment Rentals segment. The company completed two critical acquisitions in the second half of 2018—BakerCorp International and BlueLine Rental.

The BakerCorp buyout helped United Rentals expand its footprint in the fluid solutions market. The company gained access to BakerCorp’s 4,800 customers across North America and Europe. As a result, the company can cross-sell its other services in the future. The acquisition is expected to bring in approximately $295 million in incremental annual revenues.

The BlueLine buyout is expected to bring in $786 million in incremental annual revenues and add more than 50,000 customers. United Rentals gained more access to mid-sized customers and enhanced its presence in the North American region.

Stock fell due to guidance cut

Despite impressive second-quarter results, United Rentals stock fell 6% in after-hours trading on Wednesday. The company trimmed its revenue outlook for 2019. The company expects revenues of $9.15 billion–$9.45 billion with a mid-point of $9.30 billion. Earlier, United Rentals expected revenues of $9.15 billion–$9.55 billion with a mid-point of $9.35 billion. The updated guidance range is also lower than the analysts’ consensus estimate of $9.35 billion.

United Rentals also trimmed the adjusted EBITDA guidance range to $4.35 billion–$4.50 billion from $4.35 billion–$4.55 billion. The company expects to spend $1.3 billion–$1.4 billion on capital expenditure this year compared to the earlier projection of $1.4 billion–$1.55 billion. United Rentals expects the cash flow from operating activities to be $2.85 billion–$3.1 billion compared to the previous forecast of $2.85 billion–$3.2 billion. The company raised its free cash flow guidance for the year. The company expects to generate a free cash flow of $1.4 billion–$1.55 billion—up from $1.3 billion–$1.5 billion.

United Rentals cited bad weather across several regions and slow BlueLine business integration as the main reasons behind the guidance cut. During the earnings release, Mathew Flannery, the company’s CEO, said, “Our updates to guidance reflect a slightly slower than expected pace for the BlueLine integration, as well as historically bad weather in several key regions this past quarter.”

Peers’ expectations

Most of the company’s industrial peers will report their second-quarter results in the coming weeks. Analysts’ second-quarter EPS projections for Crane and Caterpillar show a YoY improvement of 10.4% and 5%, respectively. However, analysts expect CIRCOR International’s second-quarter earnings to fall 23% YoY.

With a YTD (year-to-date) return of 28.2%, United Rentals stock has outperformed the broader market. The Dow Jones and the S&P 500 have risen 16.7% and 16.1%, respectively. The company has also outpaced the Industrial Select Sector SPDR Fund, which has gained 19.4%. XLI invests in industrial stocks listed on the S&P 500.

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