Is All Golden at United Rentals?

May 4, 2005 • As expected United Rentals, Greenwich, Conn., announced very strong first quarter results this morning. (See article in Top Stories.) Unless you have your head buried in the Sahara Desert, you should have seen this coming. With the exception of a few isolated pockets, construction spending is booming • currently running at a rate of 7% over the same period last year with little or no signs of slowing down.

I listened in on United Rentals' conference call that included executive officers Wayland Hicks, John Milne, and Michael Kneeland. Once they got past the sticky wicket of the ongoing SEC investigation and class action lawsuit, URI's executive management team sounded as confident and assured as one might imagine. The only real black spot on the ledger is the ongoing struggle with their traffic control division where losses continue to force rationalization.

From my perspective the most interesting part of the entire presentation related to same store sales and rental rates. Rental rates have risen a full 9.7% over last year and same store sales 9.9%. While I am sure that the internal initiative to raise rates has been a major factor in this improvement the general robust climate has proven to be the force pushing rates higher for everyone everywhere.

As I listened to financial analysts ask questions, I couldn't help but think they weren't as impressed with the results as I was • at least not with the bottom line. With the expertise to scrutinize, I wondered if the disappointment they conveyed in the bottom line isn't a better indication or reality than URI's generally positive stance.

Milne explained that if you back out the costs for starting up new branches, those associated with the SEC investigation, and the appropriate rise in commissions paid due to this higher revenue, the amount that fell through to the bottom line was what should have been expected.

The analysts didn't seem to buy this. If you squeeze nearly 10% more top line revenue out of a cost structure that really hasn't changed all that much, shouldn't margins be incrementally higher on that revenue? How much higher? On a day when the market is trending upwards for a change, URI is heading the other direction • down more than 5% as of this writing. I don't know what the market was expecting, but it would seem they are seeing something they don't like in these numbers.