Forecast: United Rentals Dominates Market in 2024, Setting the Stage for Potential Success in 2025
Forecast: United Rentals Dominates Market in 2024, Setting the Stage for Potential Success in 2025
Investors don't need to solely invest in prominent companies making headlines to surpass the market. Firms like Nvidia and Tesla might be thrilling to observe, but a less showy, industrial stock such as United Rentals (URI 0.79%) can deliver market-beating returns as well.
Shares of the globe's leading equipment rental company have outperformed the S&P 500 index in 2024 and have potential for more upswings heading into 2025. Despite outperforming the S&P 500 with a 40% cumulative return in 2024, United Rentals appears to have benefits heading into 2025.
The perfect time for infrastructure development
United Rentals stands out as the industry leader with over 1,600 global branch locations. It focuses on North America with a diverse clientele in the construction, industrial, energy, and mining sectors. The company also boasts a highly profitable specialty solutions segment that has experienced a 24% annual growth rate over the past decade, accounting for about one-third of annual revenue.
The stock has experienced a surge this year as United Rentals' business continues to flourish. Revenue from equipment rentals, accounting for 85% of total revenue, rose 7.4% in the first nine months of 2024 compared to the previous year. Diluted earnings per share almost doubled as well. The company has rewarded shareholders by hiking dividends by 10%.
United Rentals CEO Matthew Flannery remains optimistic about the company's future prospects. In the company's third-quarter earnings report, he stated, "Longer-term, we remain hopeful about the numerous secular tailwinds we observe, particularly in large-scale projects."
One of those positive factors is escalating infrastructure spending authorized by the Bipartisan Infrastructure Law enacted in 2021. This law allocates $550 billion through 2026 to fund improvements in roads, bridges, water infrastructure, and other U.S. infrastructure projects. And it's not just federal funding that will fuel projects in which United Rentals will participate. Given all of this, it's no surprise that the stock has skyrocketed this year.
Politics-free zone
The infrastructure law undeniably offers a positive impetus for United Rentals' business, although it's challenging for investors across sectors to foresee potential changes under the incoming administration's policies. However, clawing back funds earmarked for infrastructure investments apparently isn't on the table, in my assessment.
Some may forget, but President-elect Trump himself prioritized infrastructure during his first electoral campaign in 2016. Therefore, it seems plausible that ongoing improvements to transportation systems and modernization efforts for airports, ports, and other public structures will continue.
The consensus is that the overall economy will also expand in 2025, boosting private investment. This year, gross domestic product (GDP) grew at a rate of 3% in the second quarter and 2.8% in the third quarter. The intergovernmental Organization for Economic Co-operation and Development (OECD) expects 2.8% GDP growth in the U.S. in 2025. While the majority of economists anticipate a slower rate, Goldman Sachs forecasts an economy expanding at a 2.5% pace. Any growth within that range will benefit the economy.
United Rentals is North America's market leader in its sector and has exposure to markets beyond infrastructure. GDP growth will spur ongoing investments by businesses, enabling United Rentals to maintain its growth trajectory. Projects in areas such as semiconductor manufacturing, data centers, electric vehicle and battery plants, and liquefied natural gas (LNG) and renewable energy investments will all contribute.
More upside potential
Investors should also appreciate the company's robust cash flow. It generated roughly $10 billion in free cash flow over the past five years. It invests in organic growth and actively seeks out strategic opportunities with suitable returns. It also awards a dividend, as mentioned earlier, and has lowered its share count by over 40% through share repurchases since 2012.
While the 2024 gains have increased the company's price-to-earnings (P/E) ratio slightly over 20, this remains below its last cyclical high of 27.4. Considering the underlying expansion prospects for United Rentals, this still appears to be a reasonable valuation that offers additional runs for the stock in 2025.
Given the Bipartisan Infrastructure Law, which allocates $550 billion through 2026 for infrastructure improvements, United Rentals, as a market leader in equipment rental, stands to significantly benefit from this investment surge. Moreover, with the ongoing economy expansion in 2025, United Rentals' exposure to various sectors beyond infrastructure will enable it to maintain its growth trajectory, providing further investment opportunities for those interested in finance and investing in the stock market.