Heading into President Biden's State of the Union address that was given earlier this week, we shared that we would like to hear something concrete (no pun intended) on the president's infrastructure bill that was passed in last year.
The plan is to rebuild America's roads, bridges and rails, expand access to clean drinking water, ensure every American has access to high-speed internet, tackle the climate crisis, advance environmental justice, and invest in communities that have too often been left behind. Those members that might have perused the latest Report Card for America's Infrastructure published by the American Society of Civil Engineers, the need to address the country's sorry state of infrastructure isn't new news.
As far back as the 1998 report and ones since then, the need to address the decaying domestic infrastructure became increasingly clear, making it a question of when not if. With the passage of the Biden Infrastructure bill, we now know $1.2 trillion, which includes $550 billion in new funds, will be spent with some of the expected breakdown as follows over the coming five years:
- $110 billion into roads, bridges and other major projects.
- Invest $66 billion in freight and passenger rail, including potential upgrades to Amtrak.
- $39 billion into public transit systems.
- $65 billion into expanding broadband $55 billion into improving water systems and replacing lead pipes.
Similar to the infrastructure spending on EV charging stations that we discussed recently, the bulk of the infrastructure bill's funds will be directed at the state level. However, due to a what is being called a "budgeting quirk" some of the money provided by the infrastructure law cannot be spent until Congress passes the fiscal year 2022 appropriations bill. Currently, the federal government is running under a continuing resolution that is set to expire on March 11. Once we have the 2022 appropriations bill approved, more funds should start to flow.
During his State of the Union address, President Biden shared the country will "start fixing over 65,000 miles of highway and 1,500 bridges in disrepair." We welcome that and expect more to come, which means we should start to see greater demand for a variety of commodities and equipment in the coming months that is on top of the usual seasonal pick up in construction activity. Concrete and cement, aggregates and asphalt, rebar, highway construction products, rail track, and the like as well as the need for construction equipment from the likes of Caterpillar (CAT) , Terex (TEX) , Komatsu (KMTUF) , and to a lesser extend Deere & Co. (DE) and CNH Industrial (CNHI) , as well as several others.
When approaching such a wide moat opportunity, odds are we won't capture all of it in one particular company and its shares. At times like this, rather than bet on any one company, we look for opportunities to "buy the bullets, not the guns." Key suppliers much the way Skyworks (SWKS) is a key supplier to the smartphone industry, which means that as long as those volumes are rising irrespective of market share gains by one vendor or another, Skyworks benefits.
In the case of the expected upswing in infrastructure spending, a similar opportunity exists with the shares of United Rentals (URI) , the largest equipment rental company in the world, operates throughout the United States and Canada, and has a limited presence in Europe, Australia, and New Zealand. Exiting 2021, it had roughly 780,000 equipment units across 1,288 locations in North America serving the non-residential construction market (46% of revenue), multi-family housing market (4%), and 50% industrial and other (power/utilities, manufacturing, metals & mining, food & beverage and several others). Slicing its business across those three segments, roughly half of United Rentals revenue stream is tied to infrastructure and non-residential construction. While it may be a bit simplistic, in order to do any of these infrastructure projects construction companies will need the necessary equipment.
The expected pick up in equipment demand that should benefit United Rental's revenue stream comes in the form of higher rental utilization rates and potentially pricing. For 2022, the projected North American industry equipment rental industry is expected to see revenue rise 10% compared to 2021, a year in which that revenue grew 4%. By comparison, United Rentals grew its 2021 revenue by 13.9%. Some of that was due to scale and scope, but also the management team's ability for nip and tuck acquisitions.
United Rentals has been an active acquirer of smaller, regional equipment rental companies, completing roughly 300 transactions over the last 20+ years. Folding those locations into its umbrella allowed United to expand its footprint, while it also layers in best practices and economies of scale to boost the profitability of those acquired operations. With an estimated 15% market share in the North American market, we would suspect further nip and tuck acquisitions to be had for the company in the coming quarters.
The benefits of business acquired in 2021 as well as the expected uptick in the industrial equipment rental market have the consensus view calling for the United's revenue to grow 12.7% in 2022 with revenue rising mid-single digits in 2023 and 2024 as the Biden infrastructure plan spending really kicks in. As that happens, EPS is expected to rise to $30.47 in 2023 vs. $26.98 this year and $22.06 in 2021. To put some perspective around the growth behind those figures, in 2015 United delivered EPS of $8.02 on $5.8 billion in revenue.
In terms of upside to be had with URI shares, over the last several years they've peaked out at 15x-17.2x respective EPS and bottomed out at 10x-11x EPS. Currently URI shares are trading at just over 12x expected 2022 EPS of $26.98, well off their 2021 peak at 17.2x. Some of that could be attributed to the 2021 hype over the infrastructure bill and waiting for the capital to be deployed as well as downward pressure with the overall market. Even if we keep the current P/E multiple flat and let United grow its EPS over the coming quarters to $30+ in 2023, the first full year of the infrastructure spending plan, we have upside to $366 but odds are as the company grows its top and bottom lines, we'll see some multiple expansion. Here's the thing, even if we haircut those peak P/E multiples to 14x expected 2023 EPS, we can see upside to $420.
In terms of downside risk, the midpoint of the 10-11x P/E range mentioned above implies downside to $285. With the backing of the infrastructure spending as well as the company's fresh $1 billion share repurchase authorization, that downside P/E is likely to be closer to 11x than not. Weighing those two, we see upside of close to 28% vs. ~10% downside, and we'd also mentioned that over the 2012-2021 period United has completed $4 billion in share repurchases, shrinking its share count by 37% in the process.
As members can see, we like the fundamental set up for United Rentals, and once we have a clear technical picture, we'll look to graduate the shares from the Bullpen. We would call out one potential risk, and that is being a tad too early in adding URI shares to the portfolio. Given our longer-term time horizon in general and with URI because of the five-year infrastructure spend, we'd rather be a tad early than too late.