Boosting Our Price Target for a Two-Rated Infrastructure Play

*We are lifting our price target for United Rentals to $775 from $750, but will keep our two rating intact

*The company delivered solid June quarter results, but 2H 2024 comps will become more challenging

*Here’s what we are watching that could lead us to downgrade URI to a three rating

We are nudging our price target for United Rentals URI shares to $775 from $750 following the company’s June quarter results that topped bottom-line expectations and matched the consensus revenue forecast for the quarter of $3.77 billion, up 6.2%.

Like many other companies we’ve discussed June quarter earnings for, the name of the game with United’s report was margin expansion. The company’s operating margin rose to 26.6% for the June quarter, up nicely year over year and over 200 basis points compared to the March quarter, showing the benefits of pricing and mix leverage during more favorable construction weather.

We expect that to continue in the current quarter, but we are starting to see the company bump up against tough year-over-year top-line comparisons. December quarter revenue rose 13.1% year over year, the March quarter climbed 6.1% and, as we mentioned above, the June quarter rose 6.2%. The June quarter benefitted from the inclusion of United’s Yak acquisition, which only contributed one month to the March quarter. But as we move through the coming quarters, United is going to face more difficult year-over-year comparisons because of the positive impact of infrastructure spending on non-residential construction last year.

For those wondering, there was no discussion about Hurricane Beryl on the company’s earnings call, something we found a bit surprising. Instead, management shared that it sees 2H 2024 as “just like” the June quarter. That comment and the midpoint of management’s revised 2204 revenue guidance of $15.05 billion to $15.35 billion implies 2H 2024 revenue will grow around 5.5% compared to 2H 2023. That assumes no major impact from Beryl is had, and it's slower than the 9.6% year-over-year growth booked in 1H 2024. To be clear, 1H 2024 only included four months of Yak, while management guidance for 2H 2024 bakes in six months.

This means a few things. First, United’s EPS growth will hinge even more so on incremental margin improvement. There is room for more of that as it integrates Yak and pulls more cost out of its Ahern acquisition, but overall margins are bumping up against past peak levels. Second, management commented that the M&A pipeline is rich, and a sizable acquisition could help United keep growing its EPS at a good clip. However, we can’t assume any acquisitions into our thinking until they are announced. Third comes down to the Fed and rates cuts, which once it embarks upon a rate-cutting cycle should lower project hurdle rates, driving more activity and demand for United’s rental fleet.

While those last two are items to watch for, we recognize that we are in the seasonally strongest quarter for construction activity and we have the July Fed meeting next week. For those reasons, we’ll continue to rate URI shares a two, but if they encroach upon our price target or Fed Chair Powell’s comments prove to be less dovish than expected, we may consider another rating downgrade. We will also continue to closely watch the technical set up for the shares.

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At the time of publication, TheStreet Pro Portfolio was long URI.