By: Rob Wertheimer 

Our view of rental equipment companies like URI, Sunbelt/Ashtead, and eventually maybe HRI is that they are akin to low risk compounders, trading at a steep discount to industrial and machinery averages, and a steeper discount than that to acquisitive or compounding industrials. Inorganic growth is straightforward and repeatable, whether buying companies or incremental equipment. Major rental companies have substantial scale, technology is an incremental differentiator, and the pool to consolidate is more readily visible than for any other acquisitive industrial.

Investor views on valuation couldn’t be any more different. Investors see the industry as low quality, with no barriers, one that will inevitably revert to marginal cost of capital and below, with the larger public companies presumably having no sustained ROIC advantage versus mom and pops, meaning companies should trade at something like…

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