Investing.com -- Bernstein upgraded United Rentals Inc (NYSE:URI) to Market-Perform from Underperform and raised its price target to $666 given the growing impact of specialty rental as a key driver of revenue, margins, and returns.

Specialty rental has transformed URI’s business by reducing cyclicality and boosting margins.

Over the past three years, specialty has grown at twice the pace of general rental, contributing two-thirds of United’s 16% revenue compound annual growth rate and now generating 40% of profits, up from 25% pre-pandemic.

“The Specialty segment is a secular growth story that is reducing United Rentals’ cyclicality,” Bernstein said adding that its penetration still at just 10%, compared to 60% for General Rental.  

If Specialty follows a similar penetration trajectory, it could drive a 7% revenue CAGR through 2028, with 5% broader market growth pushing Specialty’s total CAGR to 12%.

URI’s return on invested capital (ROIC) has climbed from 10% to 13% over the past three years, with over half of the increase attributed to Specialty.

Bernstein cautioned that General Rental remains a headwind, accounting for 60% of URI’s profits.

With non-residential construction spending expected to remain flat in 2025 due to high interest rates and weak large-scale project starts, General Rental revenue is likely to decline by 3%, while Specialty is expected to grow by 10%.

United’s return on invested capital has climbed from 10% to 13% over the past three years, with over half of the increase attributed to Specialty.

As a result, URI’s valuation re-rated from 4-6x EBITDA to 6-8x, and Bernstein sees a path to 7-9x as ROIC approaches 14% by 2028. Specialty’s higher margins and lower capital intensity contribute to this trend, driving higher returns and supporting valuation expansion.

A softer supply/demand environment may also pressure General Rental margins, which have already fallen from 40% to the mid-30s exiting 2024.

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