Motley Fool: Rentals to Own

United Rentals (NYSE: URI) isn’t a household name, but maybe it should be. The company makes the bulk of its revenue by renting equipment to residential and nonresidential construction projects, and to industry; it also opportunistically sells aging equipment when market prices are favorable. While that might not sound like an earth-shattering business, the stock recently traded at about $100 per share, up from about $10 a share in January 2010, making it an impressive performer over the past decade.

There’s reason to think it can continue beating the market from here. The equipment rental market is highly fragmented. United Rentals, with more than 1,100 locations across North America, claims to be the largest equipment rental company in North America, but it has only 13% market share. That leaves plenty of room for growth via expansion and acquisitions – cash-consuming activities that explain why the stock pays no dividend.

United Rentals uses its strong free cash flow (more than $1.5 billion in 2019) and debt to fund acquisitions. But it also repurchases quite a lot of its stock, boosting the value of the remaining shares; the company’s share count has shrunk by more than 10% over the past couple of years.

Construction projects aren’t ever going away, boding well for United Rentals. Despite solid growth and prospects, its forward-looking price-to-earnings, or P/E, ratio was recently below 7. Give it some consideration.

Ask the Fool

Q: What does “market cap” mean? – R.C., Lafayette, Colorado

A: It’s short for “market capitalization”; think of it as a company’s price tag in the stock market. You get it by multiplying the current stock price by the number of shares outstanding. (Many online stock-quote providers list shares outstanding, and they generally do the math for you and provide the market cap, too.)

Imagine that the Acme Explosives Co. (ticker: KBOOM) has 300 million shares outstanding and a stock price near $20 per share. Multiply 300 million by $20, and you’ll get a market cap of $6 billion. That’s the current market value of Acme Explosives. If you wanted to buy the whole company, you’d probably have to pay around $6 billion – or even more. Acquisitions often happen above market prices – sometimes due to a company’s debt obligations, or in order to avoid a bidding war.

It’s worth reviewing the market cap of any company you’re interested in. For example, if you’re thinking of investing in ride-sharing specialist Uber, note that its market cap was recently near $55 billion; that’s more than the recent market caps of Southwest Airlines, United Airlines, JetBlue Airways and Alaska Air – combined. Does Uber’s value seem reasonable in comparison? It all depends on your estimates of its long-term profit-generating potential.

Q: What’s “shrinkage”? – T.S., Charleston, West Virginia

A: It’s a term generally used in the retail industry to refer to the loss of inventory. Some level of shrinkage is routine and expected – such as that due to accidental breakage, administrative errors, fraud (by suppliers or customers making returns) or theft (by customers and employees).

The national average shrinkage rate was recently about 1.4% of sales, per the National Retail Federation.

My dumbest investment

My dumbest investment was buying shares of GoPro when they dropped from over $90 apiece to around $60. I thought its action cameras that could be mounted on helmets and other things were still popular, and I figured the shares would rebound. I ended up selling at $15, and learned to be leery of companies with one product and no competitive moat. – G.H., online

The Fool responds: GoPro had a big debut on the market. At its initial public offering, or IPO, in June 2014, shares popped more than 30% on their first day of trading, and at the end of the first week of trading, they were up 73%, at around $41.58 per share. They surged even higher later, topping $95 in September. Since that first year, shares have mostly been falling or flat, and they were recently at $3.67 apiece. So you did suffer a big loss when you sold, but it could have been even worse.

It’s often best to steer clear of IPO stocks, giving them a year or two to settle down and establish a track record of growing sales and profits. GoPro hasn’t been growing much, and as you noted, it doesn’t have much of a protective moat: Other companies can introduce action cameras, and some, such as Google, did. It’s also best when a company doesn’t rely too much on one product – or one supplier, or one customer.