Cost Variabilization Boosts Equipment Rental, Leasing Demand

2012-01-27 12:51:09

Large contractors and firms in the construction space have reported revenue growth rates despite the weakened market for construction in the U.S. as their cost structure variabilization increases toward more rental and leasing of heavy equipment, says David Wells, a Senior Equity Analyst at Thompson Research Group.

"There's going to be a lot of business that's going to go to the rental channel because they've seen the services they can provide, the reliability and the fact that you don't have to pay interest, you don't have to pay taxes, you don't have to maintain the asset," he said.

Wells has a "buy" rating on United Rentals (URI) due to the company's ability to buy heavy equipment, and rent it out to clients quickly. He says this activity by URI is another example of the level of demand in the marketplace right now.

"The interesting thing is if you look at the capex that they've done, United is expecting a gross capex figure of $775 million in 2011, pretty high level of capex. They've actually grown their overall fleet size, but they're still able to rent out that equipment at very high rates of utilization," Wells said. "In the last quarter, they reported utilization of 73.5% and low to mid 70s is kind of the theoretical max there."

Wireless Usage Growth Leads to Competition for Spectrum

2012-01-26 12:42:23

The increase in data demand and the limited spectrum availability are shifting competitive dynamics in the wireless communications space, leading carriers to engage in a mix of capex, partnerships and M&A activity to satisfy the seemingly unquenchable thirst for faster data transfers by smartphone users, says Jonathan Chaplin, Senior Analyst at Credit Suisse.

"You've basically got a land grab for spectrum going on right now, and there is very limited supply, and it has interesting implications for a couple of companies," he said. "There are two options, either moderate usage or demand or increase prices. Right now, we don't see a big demand moderation. Either the quality of service on wireless networks is going to go down or pricing is going to go up."

Chaplin likes Clearwire Corporation (CLWR) in the near term although the company had a difficult time in 2011 from a stock performance perspective. He says Clearwire is the one company in the wireless communications space with massive amounts of unused spectrum, and he believes the company's spectrum is going to increase in value significantly as data demand increases.

"In the case of Clearwire, we think with the breakdown of the AT&T/T-Mobile merger, there's going to be a big increase in demand for their spectrum. AT&T is going to need more spectrum. T-Mobile is going to need more spectrum. Leap and MetroPCS, who had planned to buy spectrum, need more spectrum," Chaplin said.

Logistics Offers Growth Prospects in Energy Infrastructure

2012-01-25 12:39:41

The primary growth prospects in the energy infrastructure space are in the logistics related to the handling of crude oil and natural gas liquids and are providing opportunities for most entities, says Brian Watson, Director of Research at SteelPath Fund Advisors, a money manager with a focus on energy infrastructure primarily through master limited partnerships.

"We've had declining crude oil, declining natural gas, declining natural gas liquids production in the U.S. for a generation practically, and now it's actually reversed," Watson said. "I think that seismic shift, which maybe hasn't totally been recognized by most of the market, creates a really interesting opportunity set for these infrastructure providers."

Watson says Buckeye Partners L.P. (BPL), a refined products transporter primarily moving gasoline, diesel and jet fuel from refining centers to consuming centers, is the firm's largest holding across its funds.

"It's a very attractive base business that benefits from annual tariff escalators and things like that. It's a very secure low-risk business with some growth to it," he said. "It trades attractively on a valuation basis, and we think it's got an opportunity to have some multiples expansion as we go forward."

Staffing Proves Resilient in Face of European Debt Uncertainty

2012-01-24 12:44:00

The staffing sector is trending up as the market is not properly valuing the fundamental as well as the secular growth opportunities, and the near-term cross currents in Europe around the sovereign debt issues are masking growth in the U.S., says Kevin D. McVeigh, CPA, Senior Business Services Analyst at Macquarie Group Limited.

"When you layer in how quickly temporary help is growing as a percentage of total nonfarm payrolls, I think it bodes well for a much greater market opportunity," he said. "If you look at that overall, it is trending at about 1.8%, in a period that I would characterize as early to midcycle, versus the prior two peaks of about 2%."

McVeigh has chosen Robert Half International Inc. (RHI) as a top pick in the staffing sector due to how healthy the demand has been on the IT side in the near term and the well-capitalized balance sheets of staffing firms overall as a group.

"One area in particular that has really, even through the downturn, exhibited resilient characteristics and has participated in and enjoyed nice strength in the upturn has been IT staffing, which bodes well for companies such as Kforce and Robert Half," McVeigh said.

Capex Outlook Points to Earnings Increase In Truck Leasing

2012-01-23 15:43:17

Increased capital expenditures guidance in 2012 may mean higher earnings for truck-leasing companies as they use capex to refresh their commercial rental fleets in response to increased demand for full-term lease contracts, says Kevin W. Sterling, CFA, Senior Vice President and Senior Equity Research Analyst at BB&T Capital Markets.

"Now we are beginning to see the commercial rental demand translate to more leasing activity," he said. "I find it encouraging that we are seeing an uptick in leasing because that tells me that the business community feels a little bit better about the environment and their long-term demand picture."

Sterling has a "buy" rating on Ryder System, Inc. (R). He believes 2011 is going to be a record capex year for Ryder with the company spending about $1.8 billion, and he says he expects 2012's capex spend to surpass 2011's level. Sterling also notes Ryder only buys a truck in its leasing division when it knows it has a lease agreement in hand.

"Last cycle, Ryder was at $75 stock, and today, it's in the low $50s, but yet the company is spending a record level of capex, which could imply record earnings," Sterling said. "In my opinion, there is a disconnect between the fundamentals and the stock price, which I believe is being driven by economic uncertainty. History tells us that as Ryder's capex increases their earnings increase."