How to Spot a Genuine Momentum Stock

One stock that’s experiencing serious upward price momentum is in the equipment rental business. Momentum stocks might typically be associated with other market sectors, but United Rentals, Inc. (URI) is doing fantastic operationally and the market is bidding. 

It’s kind of odd to think of an equipment rental company soaring on the stock market, but United Rentals is doing just that. In its most recent quarter, the company handily beat Wall Street consensus and raised its full-year guidance. 

According to the company, its second quarter produced sales of $1.4 billion, up 16.7% from $1.2 billion in the same quarter last year.

 Management said that the company is experiencing solid demand in non-residential construction. It’s renting out more equipment at higher margins than normal. 

Second-quarter earnings were $94.0 million, or $0.90 per diluted share, compared to $83.0 million, or $0.78 per diluted share, representing a gain of about 15%. 

Adjusted earnings per share were $1.65 on a diluted basis, which was way above Wall Street consensus. 

United Rentals is one of the largest equipment rental companies in the world, with more than 12,000 employees. The company is considered a mid-cap stock and has been doing extremely well since the middle of 2012, which you can see in the stock chart below. 

 

Chart courtesy of www.StockCharts.com 

Not only did United Rentals beat consensus, but it also raised its outlook for adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) and tightened its revenue range to $5.55–$5.65 billion for all of 2014, up from the previous outlook of $5.45–$5.55 billion. 

Many companies do not have their SEC Form 10-Q documents ready when they announce their quarterly earnings, so it’s always appreciated when a company like United Rentals does. (See “The Stocks That Will Be the Highlight of 2Q14.”) 

United Rentals produces close to 90% of its revenues from general equipment rentals and about 10% from the sale of rental equipment. These revenues were flat with 2013, illustrating how important and significant the growth has been in equipment rentals. 

So the stock is going up and so are the company’s financials. I think this position will tick higher, and I wouldn’t be surprised at all if management effected a share split. 

The company has also been buying back its own stock, spending $228 million in the first half of this year. Management plans to keep buying its own shares until it hits its authorized limit of $500 million by April of 2015. 

All in all, it was a very good quarter for United Rentals and the strength in its business with industrial customers is encouraging. 

Double-digit growth is a difficult financial metric to achieve these days, so when a company does so, institutional investors will be all over it. This has been the case with United Rentals for the last couple of years; and this should continue to be the case right into 2015. 

Price targets are going up and a two-for-one stock split would certainly make the position both more attractive to individual investors and more liquid. 

This position is going higher.