What We’re Watching as We Upgrade This Construction Holding
Continued strength in infrastructure and a rebound housing market suggest estimates are conservative.
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* Improving clarity on overall construction leads us to upgrade United Rentals.
* Consensus 2025 EPS is looking conservative, especially if housing starts to rebound.
* With the Fed’s interest rate decision next week, there is a technical support level we’re watching.
We're continuing to share investor conference "nuggets" we’ve been collecting this week, and that has us turning our attention to Three-rated TheStreet Pro Portfolio holding United Rentals URI.
URI shares have been a strong performer for the portfolio because of the ramp in non-residential spending tied to various stimulus packages out of Washington. That more than offset the weakening housing market, but as the Fed moves deeper into its rate-cutting cycle and mortgage rates become more favorable, we should see a pickup in that market, which averaged 41% of total construction spending over the 2012-2023 period.
While not the highest, our current price target of $750 is well above the $710 consensus price target. However, our thinking is that the combination of a rebounding housing market and continued infrastructure spending should lead that consensus price target to move higher as earnings expectations for URI inch higher. The current 2025 consensus EPS estimate of $47.79 is below the $49.30 figure we get when we annualize URI's H2 2024 consensus EPS. This reaffirms to us the likelihood the consensus 2025 EPS forecast has upside, especially as it doesn’t factor in any major rebound in housing construction.
During URI's presentation at the Morgan Stanley Laguna Conference this week, management commented it is still in the relatively early innings when it comes to the various infrastructure spending programs and other growing markets, including data center. All told, the company sees roughly $2 trillion in non-residential construction spending unfolding over the next decade. While that should keep the company busy, management said it continues to look for nip-and-tuck acquisitions to expand or bolster its geographic reach as well as to enter into new product markets.
That is quite a big figure but when we think more about it and the potential rebound in the housing market, odds are that 2025-2026 or so could be the peak of construction activity. That clarity means we will want to be owners of URI shares and that, in turn, is leading us to upgrade URI to a Two rating from Three. For now, we will keep our $750 price target but as we collect construction data, we will revisit it. In keeping with a Two rating, we will be watching support for the shares near $680 should the Fed deliver a sobering rate cut forecast next week.
At the time of publication, TheStreet Pro Portfolio was long URI.
