United Rentals

United Rentals reported record revenue of $4.4 billion with growth in the core rentals business accelerating 12.7% to $3.8 billion. Adjusted EBITDA grew 13.6% to $2.1 billion but this was flattered by a $49 million gain on an asset disposal.

Why it matters: Operating metrics looked great across most of the business. General rentals growth of 6.6% was outdone by tremendous 24.8% growth in specialty rentals. Mega projects are leading the way, though local markets are improving. Fleet productivity grew 3.4%, including historically high time utilization. All these positive indicators caused the company to boost 2026 guidance for revenue by 3% and adjusted EBITDA by 4% at the midpoint. The combination of robust demand and high utilization caused the company to bump up its capex guidance by 14%, further supporting the growth narrative. Our only concern was that adjusted EBITDA margins declined 40 basis points, excluding the gain on sale, due primarily to negative mix from ancillary specialty revenue. However, management indicated margins were up 40 basis points adjusting for the outsized growth. This issue appears to be fading.

The bottom line: We are increasing our fair value estimate for narrow-moat United Rentals to $1,017 per share from $960 on the guidance boost. Shares spiked 12% intraday and are pricing in a great deal of sustained optimism in our view. However, in other positives, the company returned almost $1 billion to shareholders via share repurchases and dividends. The company also indicated S&P is contemplating upgrading their credit rating to investment grade with net leverage of just 1.8x.

Our $1,017 fair value estimate equates to about 22 times our 2026 EPS estimate. The valuation is not particularly demanding in a historical context.

The company continues to see relatively resilient demand across its portfolio, which is diversified across multiple industries. United Rentals doesn’t particularly overindex to construction, which has been a comparatively weaker end market. We forecast 11% growth and modest margin recovery in 2026 as the company is experiencing improving fundamentals and increased visibility driven by mega projects. Thereafter, we forecast a return to low-teens revenue growth, which tapers off toward the end of our forecast horizon, resulting in a 8% CAGR. This is consistent with the firm’s 10-year CAGR and beyond, and we don’t see anything in the competitive landscape or macroenvironment that would lead us to take a divergent view.

We assume only about 100 basis points of gross margin expansion during the forecast period because we don’t have conviction on the mix dynamics between specialty and general rentals. For some time, it appears the business has been facing some pricing pressure in general rentals with a more resilient and growing mix of specialty, which is why we modeled relatively modest margin expansion. While we believe the company has successfully established its one-stop-shop value proposition for customers, we do not expect general rentals to have significant pricing power; therefore, margin/return enhancement will be driven by ongoing growth in specialty. We are reluctant to take a more aggressive posture on margins now, but we will continue to monitor this. We have far greater conviction that the revenue forecast is more robust.

Our stage two forecast period incorporates an estimated investment rate of 20% and earnings before interest growth rate of 5% with perpetual growth of 3%. An 8.0% weighted average cost of capital derives from a market-average cost of equity and the firm’s current capital structure.

We assign United Rentals a Morningstar Economic Moat Rating of narrow due to a cost advantage similar to that of UK-based peer Ashtead, which operates under the Sunbelt Rentals brand. We believe competitor Herc has yet to achieve the scale to realize similar benefits. Based on our research, United Rentals is typically the largest customer for all of its main equipment suppliers, so it realizes a cost advantage of 10 basis points-50 basis points just with regard to disposing of equipment efficiently and generally has the most favorable terms as far as canceling orders during downturns to preserve cash flow and financial flexibility. Additionally, the company was the first among its peers to adopt a more cost-efficient used-equipment strategy, meaning it disposes of older equipment through retail and wholesale channels (primarily selling it back to customers) rather than through auction channels used by competitors, which incur additional fees and reduce returns. The latter is not an enduring source of competitive advantage, as peers are beginning to replicate this, but it reinforces the concept that United Rentals is ahead of its peers and a best-in-class operator that knows the name of the game is maximizing fleet returns.

With regard to economies of scale, United Rentals maintains a fleet size and branch network that is orders of magnitude larger than most of its competitors’. Especially in terms of serving national accounts (greater than $500,000 rental revenue per year), this matters for securing business. United Rentals maintains a network density and fleet availability that are superior to its peers. As a result, it can offer customers more products with greater efficiency (lower transportation costs, less need to subrent equipment to meet customer needs, and so forth). We believe this is evidenced by United Rental’s superior growth rate versus peers and that the largest industry players are capturing a growing share of the market faster. We also believe that United Rentals has firmly established economies of scope as demonstrated by its one-stop shop strategy. Not only does it offer a very broad array of equipment for general rental, but by expanding its specialty business, it layers on additional solutions that relieve customer pain points. Overall, we believe the equipment rental space benefits from enduring secular tailwinds because there is a very valid outsourcing argument for customers. It’s more capital-efficient to obtain many of these products and services from third parties like equipment rental companies.

Evidence of pure pricing power at United Rentals is somewhat more ambiguous. EBITDA margins declined somewhat leading into the pandemic and have since recovered. The company discloses a breakout for revenue and gross margin for general rentals and specialty, and it appears that either gross margins for general rentals are under moderate pressure or the company is discounting that part of the business to capture more specialty, which appears to have higher and more resilient gross margins. As such, it’s not surprising that the company’s strategy is to increase the mix of specialty.

United Rentals’ net income margin has been consistently improving, but this is also favorably affected by corporate tax reform and the company’s evolving capital-allocation strategy toward lower financial leverage (lower interest expense). On the other hand, returns on invested capital have steadily been improving as cost advantages manifest and the company utilizes its fleet more efficiently. We are skeptical that pure financial engineering (lower returns, less debt) is driving the improvement in ROIC. In aggregate, we are confident that cost advantage is present and differentiated, because otherwise the market leader would not be outshining the peers by as much. It will take meaningful capital and time to close the gap with United Rentals; the company has both a first-mover advantage and some elements of network effects that protect/insulate it, and the market remains fragmented. Therefore, the 10-year duration of excess returns conveyed by a narrow moat strikes us as reasonable. We would highlight the historical operating margins of the top three players (United Rentals, Sunbelt, and Herc) to demonstrate that only the top two players seem to have achieved the scale to justify a narrow economic moat rating.

We think increasing rental penetration can be a key driver for the industry, and this will favor the market leaders. The equipment rental market in North America is approximately $50 billion, and we believe it’s poised to grow by at least midsingle digits over the next five years. This is driven by multiple factors. First, overall investment in large projects such as infrastructure, semiconductor manufacturing, liquefied natural gas, and other construction provides durable tailwinds. These large, complex projects favor market leaders that can offer a greater breadth of products and solutions to customers. Also, we anticipate growing rental penetration and specialty equipment sales as customers increasingly outsource. Currently, rental penetration rates in North America stand near 55%. We anticipate this will grow for the foreseeable future as more contractors forgo buying new equipment in favor of renting because it drives down their project costs. By renting, customers can reduce their own inventory of equipment, eliminate maintenance costs, and save on storage and warehousing costs, thus improving their own profitability.

United Rentals will continue to gain market share owing to its superior network of locations and robust product offering.

The company will drive further penetration of specialty rentals, driving pricing power and enhancing returns.

The company could replicate its success abroad.

United Rentals has no pricing power, and returns could deteriorate.

Competitors could capture share via further consolidation and/or price competition.

The company could make poor acquisitions.