McGrath RentCorp: Attractive Play On Business-To-Business Rental Equipment (NASDAQ:MGRC)
When most people think about companies that are dedicated to renting out equipment, the initial inclination might be to think that the firm in question focuses on renting equipment to individual consumers. But the fact of the matter is that even companies have a need to rent equipment from time to time. And one company dedicated to providing this kind of service is McGrath RentCorp (NASDAQ:MGRC). In recent years, management has done well to grow the company’s top and bottom lines. Growth has been steady and the future for the business is likely sound. Relative to other similar firms, McGrath RentCorp probably is more or less fairly valued. But on an absolute basis, shares do look to be trading on the cheap. For investors who are interested in the long haul, this enterprise might make a good prospect to consider.
A diverse rental play
The management team at McGrath RentCorp describes the company as a diversified business-to-business rental firm. But to better understand the company, we should break it down into the four segments that it currently operates. The first of these is called Mobile Modular. Modulars are basically setups that are aimed at providing quick and often short-term structures, whether it be construction field offices, restroom buildings, sales offices, health care clinics, childcare facilities, and more. These products are generally made from wood or metal siding and can be installed with heat, air conditioning, lighting, electrical outlets, and floor coverings. The company can also customize the interiors of their modulars in order to provide for partitioning, cabinetry, and even plumbing facilities.
Next, we have a segment called Enviroplex. This unit focuses on the production of classrooms using the modular buildings that the company sells. For the purpose of financial reporting, these two segments are combined, with revenue from them accounting for 64% of the company’s overall revenue. Although the company does make most of its money from renting out these units, it does also sell them.
Next, we have a segment called Electronic Test Equipment (under the TRS-RenTelco brand name). In short, this segment rents and sells electronic test equipment to customers across the US and even some globally. Examples of equipment include fiber optic test equipment, oscilloscopes, amplifiers, power source test equipment, and more. This unit was responsible for 22.7% of the company’s revenue last year.
And finally, we have the Adler Tanks segment of the company. Through this, the company provides liquid and solid containment tanks and boxes, including vacuum containers for sludge and solid materials, fixed axle steel tanks for groundwater, wastewater, organic liquids, sewage, and more, as well as dewatering boxes and roll-off and trash boxes for the temporary storage and transport of solid waste. This particular segment made up the remaining 13.3% of the company’s revenue last year.
Over the past few years, the management team at McGrath RentCorp has done a great job growing the company. Revenue has increased in each of the past five years, climbing from $462 million in 2017 to $616.8 million in 2021. That works out to an annualized increase of 7.5%. We have seen a number of contributors to this top-line expansion. For instance, the number of units under its Mobile Modular and Enviroplex segments rose, climbing from 52,188 to 65,673. The company has also benefited from a rise in the amount of equipment under its Electronic Test Equipment, as well as an increase in utilization rate from 62.9% to 67%.
On the bottom line, we have seen some more volatility. Net income has been all over the map in recent years, ranging from a low of $79.4 million to a high of $153.9 million. Last year, this metric came in at $89.7 million. Of course, we should also pay attention to other profitability metrics. Consider, for instance, operating cash flow. This metric has risen over time, climbing from $122.4 million in 2017 to $195.7 million last year. A similar trend can be seen when looking at EBITDA. It increased in each of the past five years, climbing from $178.3 million in 2017 to $246.6 million in 2021.
So far, financial performance for the 2022 fiscal year is looking rather robust. Revenue of $145.4 million in the first quarter of this year handily beat the $121.2 million generated at the same time one year earlier. As revenue increased, so too did profitability. Net income rose from $17.4 million to $18.8 million. Operating cash flow also grew, rising from $37.6 million to $51.7 million. And over that same window of time, EBITDA jumped from $24 million to $30.4 million.
For the full 2022 fiscal year, management has provided some guidance. They currently expect revenue of between $675 million and $705 million. At the midpoint, that would translate to a year-over-year increase of 11.9%. Meanwhile, EBITDA is expected to be between $260 million and $275 million. No guidance was given when it came to other profitability metrics. But if we expect that they will increase at the same rate that EBITDA should, then we should see net earnings of $97.3 million and operating cash flow of $212.3 million.
Using this data, we can effectively price the company. Using the 2021 results, we can see that the firm is trading at a price-to-earnings multiple of 22.3. This drops to 20.6 if we rely on 2022 estimates. Although this metric shows the company being rather pricey, the same cannot be said when looking at other profitability metrics. For instance, the price to operating cash flow multiple of the company should be 10.2. That number should decrease to 9.4 if our 2022 estimates are accurate. Meanwhile, the EV to EBITDA multiple, using 2021 results, is 9.8. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 5.8 to a high of 14. In this case, McGrath RentCorp was the most expensive of the group. Using the price to operating cash flow approach, the range is from 2.5 to 64.7. And using the EV to EBITDA approach, the range is from 5.1 to 46.4. In both of these cases, three of the five firms were cheaper than our target.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Fortress Transportation and Infrastructure Investors (FTAI)||N/A||64.7||46.4|
|Textainer Group Holdings (TGH)||5.8||2.5||12.0|
|United Rentals (URI)||14.0||5.7||6.8|
The data shown here suggests to me that, on the whole, McGrath RentCorp is a solid operator that likely has a bright future ahead for it. Overall growth has been consistent on both the top line and relative to cash flows. Although shares of the company looked to be fairly priced relative to similar players, I do think that, on an absolute basis, shares might be a bit cheap. And because of that, I have decided to rate the enterprise a ‘buy’ candidate at this time.