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UBS says time is right to buy rental equipment stocks

The rental equipment sector may not be on a lot of radar screens, but UBS is out with a report today that provides some convincing evidence that it may be time to perk up and pay attention.

In a new survey of branch managers, UBS found that business conditions are the best they have been in five years, with plenty of optimism for the year ahead.

Some 42 per cent of respondents said they expect rental rates to rise sequentially over the next few months, while only 13 per cent expect declines. "Given typical winter seasonal headwinds to rates, we see responses as particularly bullish," wrote UBS analyst Henry Kirn.

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Branch managers said they expect higher demand in 2011 from commercial construction, industrial, and infrastructure markets. Not so surprisingly, expectations were not nearly as rosy for residential construction demand.

While it's easy to read all this as a vote of confidence in the economy, it's worth noting that contractors tend to opt to rent equipment instead of buying when economic times are uncertain.

Upside: UBS maintained its buy ratings on United Rentals Inc. , RSC Holdings and H&E Equipment Services Inc. . "We like the rental names in front of likely continued increases in utilization and rental rates, driven by an improving North American economy and a secular shift to rental from ownership. Additionally, we continue to see current valuations as attractive," said Mr. Kirn.

Glacier Media Inc. is likely to soon declare its first dividend, predicted Canaccord Genuity analyst Aravinda Galappatthige, thanks to declining debt levels, rising free cash flow and a strengthening top line. While it may be only about 5 cents a share, that's still a yield of 2.2 per cent, and there's potential for a high dividend growth rate going forward, he said.

Upside: Mr. Galappatthige maintained a "buy" rating and a $3.05 target price.

Bird Construction Income Fund reported much-weaker-than-expected results after the market closed Monday, but Tuesday's resulting big stock slide has led to a great buying opportunity, said National Bank Financial analyst Benoit Caron. "We believe this typical panic reaction is a huge mistake and that Bird should be bought down here," said Mr. Caron.

Downside: Mr. Caron cut his price target to $37.50 from $42.50.

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SNC-Lavalin Group Inc. reported better-than-expected third-quarter earnings and should continue to grow the order backlog in its packages and services business, said RBC Dominion Securities Inc. analyst Sara O'Brien. The company has been awarded over $1 billion in contracts so far this quarter and bidding activity remains strong, she said.

Upside: Ms. O'Brien hiked her price target by $4 to $62 and rates the stock as an "outperform."

Ventana Gold Corp. has revealed a scoping study and resource estimate for its La Bodega gold project in Colombia that suggests a major near-surface underground mine with low capital and operating costs. "We believe this milestone may mark the emergence of the company from a long period of underperformance typical of companies during the feasibility stage of their life cycle," said TD Newcrest analyst Daniel Earle.

Upside: Mr. Earle upgraded the stock to "speculative buy" from "hold" and hiked his price target by $2 to $16.

Silver Wheaton Corp. has a much stronger growth potential than many of its peers, driven by the ramp-up at its Penasquito project in Mexico and the silver output expected to come from the Pascua-Lama project on the Chile-Argentina border starting in 2013, said CIBC World Markets Inc. analyst Cosmos Chiu.

Upside: Mr. Chiu hiked his price target by $6 to $37.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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