Jana Partners, a major investment firm, has acquired a 6-percent ownership stake in United Rentals. This show of confidence in United Rentals has greater significance than just helping boost United’s stock price, which had tumbled some in recent weeks reflecting investor jitters in regard to slumping oil prices.
It’s been discussed on this website and other places that low oil prices are not a huge sucker punch to the gut of the equipment rental industry. Yes, of course there are rental companies right in the middle of oil country and very much dependent on it for their livelihood and clearly some of those companies are taking a hit right now. And those companies, for the most part, don’t have the ability of a national rental company to just redeploy their assets elsewhere, although some are able to diversify depending on location and market.
Some of those companies fleeted up in response to shale oil plays or more traditional oil drilling and whether the revenue was coming from downstream or upstream sources, some suddenly found themselves overleveraged. So we’re not pretending there’s no impact here or in any way downplaying the impact of the oil slowdown on some of those companies and employees who might lose their jobs.
But looking at the equipment rental industry in North America as a whole, there are positives to low oil prices, the obvious one being lower operating costs for rental companies that pay a lot of money to keep trucks on the road, as well as sales staff and other transportation costs. Lower oil prices means lower costs for construction companies as well, making it easier for them to operate and, in some cases give a green light to a project that might have been questionable with higher costs. Consumers overall have more disposable funds to start businesses, to buy houses and new cars and the whole economy gets a boost. All of that helps rental companies be profitable.
Investors have been nervous lately because of the oil slump and a big investment in a major rental company such as United Rentals is evidence of overall greater confidence in the rental industry by the investment community. So a small rental company looking for a loan to buy a new building or finance fleet might find more receptive ears when it goes to investment sources. There’s a ripple effect and the more that big investors see the rental industry in a positive way, the more that smaller capital sources are likely to as well.
This development brought back to me the very first time I visited United Rentals back in 1998 when few of us could imagine how big the company would become by 2015. I had a long conversation with founder and first CEO Brad Jacobs. We discussed one of its competitors that was facing some financial difficulty at the time and Jacobs strongly expressed hope that it would pull through. When I asked if, off the record, he really felt that way, or if another rental company’s difficulties could in fact create some opportunities for growing competitors, Jacobs insisted that he did indeed feel that way. He explained that every time a major rental company faced financial difficulty it negatively affected the way the investment community viewed the industry. Over the years he reiterated that view, so that if a public company presented a strong performance in quarterly reports, it was a good thing for United Rentals because investors would feel confident in the industry as a whole.
The rental industry has come a long way since that time and overall strong rental industry performance is much the reason why rental penetration has grown as much as it has in the past 20 years. So Jana Partners’ investment in United Rentals is not just good for the bigger rental companies, but it’s good for smaller rental companies in smaller communities doing business on a local level because the national and indeed global consciousness as a whole sees the strength and viability of the rental industry in the face of adversity and odds.
And again it all comes down to performance. Corny as it may sound, every time your rental company serves customers well, it helps advance the rental industry as a whole. Public confidence in the industry as a whole is a major factor in its growth.
