Sunday, August 19, 2007

Hit #180 (United Rentals)

United Rentals (URI) is being taken out by private equity group Cerberus in a $6.6 billion deal. The cash offer, of $34.5/share, represents a gain of 133.9% over my average cost per share of $14.75.

Given the rapid deceleration in construction spending, both residential, and (soon) commercial, it seems that Cerberus could not have picked a worse time. The offer represented a tiny premium to its previous day's close, and that may be a consolation.

The only other smaller, independent construction equipment rental company seems to be H&E Equipment Services (HEES), which went public earlier last year. Shares look attractively priced, but I will be waiting for more sure signals from the construction industry before buying.

One name that you will see often on URI leased vehicles is JLG, a prominent manufacturer of various lift vehicles. JLG was acquired earlier this year by Oshkosh Truck (OSK) - see my post on a construction peak sign. The latter remains a good long-term bet on a worldwide construction/mining/resource boom.

The resource boom has led to sharp appreciation in stocks of other heavy construction and earth-moving vehicle manufacturers. For believers in a new era in resources, these are still a good bet, though I would rather wait for a global slowdown and the resulting pullback to add in volume. But a prolonged slowdown and an equipment glut may threaten some of them. Here is a list of potential buys in the sector:
  • Joy Global (JOYG): Prefer waiting for a better entry point.
  • Bucyrus International (BUCY): Insider activity indicates that a small position can be opened right away, adding more as opportunities arise.
  • Terex (TEX): Same comment as for Bucyrus. Also has a much higher chance of surviving a severe/prolonged downturn.
  • Agco (AG): Agco manufactures as well as distributes mostly agricultural equipment. This has been a good turnaround story so far, and makes for a perfect target for a larger strategic buyer.
  • CNH Global (CNH): A sound long-term bet. Also a possible buyer of Agco.
  • Deere (DE): I prefer waiting for a better price.
  • Caterpillar (CAT): See comment on Deere.
  • ASV Inc. (ASVI):The most promising bet in the sector. Insider activity is bullish. ASV is a sitting duck for an acquirer.
  • Kubota (KUB): I do not know enough about this Japanese manufacturer to make any recommendation.
Ingersoll-Rand (IR) just got out of this sector altogether by selling its Bobcat division to Doosan Infracore of Korea. Only time will tell if they got out at the top!

Looking much farther into the future, companies making underwater navigation equipment may have a new market to tap - ocean-bed mining. Players include Teledyne (TDY) (via its Benthos acquisition a while ago), Oceaneering International (OII) and Acergy (ACGY).

Extending coverage a bit more, Force Protection (FRPT), a maker of heavy-duty impact-resistant military vehicles should be acquired in the near future. The stock has had a spectacular run over the last few months, but could still get a substantial premium in the event of a takeover.

Previous hit - Neoware (#179)


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