Sell United Rentals ahead of construction slump, Bernstein says

Shares of United Rentals are poised to slip in the coming year as the construction sector slows, according to Bernstein. The firm on Thursday downgraded shares of the rental company to underperform from market perform and cut its price target to $269 from $307. That’s a roughly 19% downside from where shares currently trade. The downgrade comes as Bernstein sees United Rentals’ organic growth slated to turn negative in the coming 12 months. “On-the ground sentiment is deteriorating, construction equipment demand is showing signs of slowing, Money Supply growth, which leads URI organic revenues by four quarters, points to negative organic growth in ’23,” Chad Dillard wrote in a note. “In contrast, the street forecasts 7% revenue growth in ’23.” Construction slump Demand destruction in construction, which constitutes roughly half of United Rentals sales, is a major headwind. Though recent bills such as the Inflation Reduction Act and CHIPs act could help, it likely won’t be enough to alleviate pressure on shares, said Dillard. “The material cost inflation and lack of affordability are challenging economics of residential and non-residential new builds,” he said. “The average house costs 8x the average annual income, higher than on the eve of the GFC, and non-residential construction cost growth is outstripping real-estate price growth.” In addition, United Rentals has benefited from tight supply chains that have allowed it to over earn on used equipment and rental sales. As demand slows and availability of goods increases as the supply chain bounces back, this will be a headwind to United Rentals gross margins. Now is a good time to sell as the stock has risen 35% in the last month, signaling that the market has not yet priced in the potential for declines ahead. “As fundamentals slow in 2H22, and negative revisions risk becomes clearer, we expect URI stock to underperform the broader market,” Dillard wrote.

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