Inside Wall Street: The Bulls' Case for a Lowly Construction-Gear Renter
But how many investors are aware of companies engaged in some mundane or boring businesses like, say, renting out equipment -- from backhoes and forklifts to air compressors and generators -- to industrial and nonresidential construction customers?
Clearly, some savvy bargain-stock hunters are, and one they find attractive is RSC Holding (RRR). This Big Board-listed company is one of the largest rental equipment providers in North America. It operates a network of 484 rental locations in 40 states and three Canadian provinces, serving about 350,000 customers. It generated rental revenues of $1.1 billion in 2009.
However, RSC isn't riding high. In 2008, its rental revenues were greater than in 2009, at $1.5 billion. And 2009's operating income fell to $80 million from 2008's $398 million. The only positive news was that RSC's 2009 revenues andnet loss of $59.4 million beat analysts' forecasts.
A Turnaround Play?
Still, the economic downturn hit RSC pretty hard and pounded its stock, which has fallen to $6 a share from a 52-week high of $9 on Aug. 7, 2009. Some big institutional investors bailed out as of Dec. 31, 2009, including Wellington Management and Goldman Sachs.
So what's RSC's appeal to investors who are buying its shares now? They see it as a turnaround play as industrial production and construction activity picks up with the economic recovery. They believe RSC -- and its stock -- will begin performing strongly from here.
"We expect a positive year-over-year comparisons starting in the second half of 2010, and with our improved balance sheet, strong free cash flow, reduced debt, and execution skills, we are in position to take full advantage of the economic recovery," says RSC CEO and President Erik Olsson.
"Playing Offense" Now
Indeed, RSC wasn't idling while business took a dive in 2009. It slashed costs by $174 million, generated an impressive $397 million in free cash flow and cut back debt significantly. It also shifted its emphasis to the industrial and nonresidential construction market, which now accounts for 58% of revenues (up from 55%), away from the residential market.
Olsson says it plans to increase capital spending on new equipment to meet an expected jump in demand from the industrial and nonresidential market.
"Given the expectation of improved demand down the road, RSC is shifting its attention to 'playing offense,' investing in people and in its fleet [of equipment] and shifting some capital expenditures planned for 2011 into 2010," notes Vance H. Edelson, analyst at Morgan Stanley. (It owns shares and has done banking for RSC). He rates RSC overweight with a 12-month price target of $14.
During a conference call with analysts in February, RSC's Olsson indicated that demand for rental equipment started bottoming out last year. To some investors, that signaled the time to jump on RSC. Henry Kirn of investment firm UBS recommends buying the stock because he believes rental companies are among the early beneficiaries of a recovering economy.
Kirn expects RSC to return to profitability in 2010 and forecasts earnings of 15 cents a share on revenues of $1.24 billion and 55 cents in 2011 on sales of $1.43 billion. In 2009, RSC posted a loss of 61 cents a share on revenues of $1.27 billion.
Who's Right: Sellers or Buyers?
At this point, RSC still has a lot of work to do to fully convince Wall Street that rising GDP and improving industrial production numbers will significantly boost its sales and earnings. Of the 12 analysts who follow the company, seven remain neutral on the stock, and only five rate it a buy. However, none recommend dumping it.
Although several big institutional investors have sold a lot, there were also buyers, including Fairholme Capital, which bought 4.7 million shares as of Dec. 31, 2009, boosting its stake to 10.4%. Plus, Royal Bank of Scotland acquired 2.2 million shares, increasing its holdings to 2.2%. BlackRock Institutional Investors was also a buyer, purchasing 1 million shares and lifting its stake in RSC to more than 1%.
Clearly, those who sold did so when the stock was falling. And those who bought did so at an opportune time -- if the bulls are right that the stock will now head higher. The maxim that investors should buy low and sell high is always a helpful rule, if you can do it.
Editor's Note: This story has updated to correct the names of big shareholders that sold RSC as of Dec. 31, 2009.