RSC Rents And Then Prints Cash

By Sham Gad | February 21, 2010 AAA

RSC Holdings (NYSE: RRR), one of the largest equipment rental providers in North America, today announced results for the fourth quarter and year ended December 31, 2009. For the quarter, the company reported a loss of 28 cents diluted EPS and a loss of 57 cents for 2009. Q4 sales of $244 million were down nearly 35% from the year-ago quarter.

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Down But Not Out
RSC is one of the largest rental equipment companies in the U.S. In the highly fragmented U.S. market, RSC has a 4% market share, only smaller than United Rentals' (NYSE: URI) 7% share. Hertz Equipment Rental Co. (HERC), a division of Hertz Global (NYSE: HTZ), and Home Depot (NYSE: HD) are the next major public players with 4% and 2%, respectively. Accounting for the 4% market share of privately owned Sunbelt, the remaining 80% is fragmented across hundreds of businesses.

To say construction equipment rental demand has fallen would be an understatement. According to RSC, its rental volume was down by 25% quarter over quarter, along with a near 10% decline in rental rates. In addition, fleet utilization was 56%, down from 68% at this time last year. Consider that at the height of the real estate construction mania, utilizations were 90% and above. So these declines should come as no surprise.

Bottoming Out
RSC management, one of the best in the industry, is now cautiously optimistic that the equipment rental industry is improving. According to CEO Erik Olsson, "We believe we are now at or near the trough in the economic cycle. While the first half of 2010 will be challenging ... we expect to see gradual improvement in our business during the course of the year." Whether this improvement actually occurs, time will tell. In the meantime, consider the advantages of companies like RSC.

Equipment rental is a much better option for cash-strapped customers or businesses who want to maintain more flexible operating costs. It costs less to rent than to buy construction equipment, and businesses can match their equipment expenses with actual construction. This means little or no idle time for expensive equipment. In addition, RSC has brilliantly managed the business during this downturn. Despite a net loss of $59 million in 2009, the company pulled in nearly $400 million in free cash flow. That number represents a 14% free cash yield based on a $2.9 billion enterprise value. Despite having over $2 billion in debt, RSC's balance sheet remains stronger than rival United Rental and Hertz Global. In addition, insiders own more than 60% of RSC versus 6% insider ownership for United Rental, a compelling motivation for management to look after the long-term value of the company. (For related reading, check out Can Insiders Help You Make Better Trades?)

Patience Is Bliss
With nearly 56% of rental revenues coming from industrial/non-construction related end markets and 3% coming from residential, RSC will be one of the first to benefit from any industry improvement. The company has more than 457 rental locations all over the U.S. and benefits from having national scale and geographic diversity. Shares sitting at $7 are well below the 2007 highs of $21. It's likely that price won't be revisited anytime soon, but the upside scenario looks strong from here.

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