Description Ashtead (“Sunbelt”) is the second largest equipment rental company in the States, and cyclical fears plus a few minor operational missteps have created an attractive entry point into a secular winner. I also believe Sunbelt is under-earning to a larger degree than peers because of the organic nature of recent growth. Business Overview I'll keep this short because this and other equipment rental companies have been covered on VIC. Sunbelt buys and maintains a fleet of equipment including aerial work platforms (30% of fleet), forklifts (20%), earthmoving (14%), power and HVAC (11%) and more. Equipment is depreciated over 10 years (chosen to make equipment disposals breakeven at the low point of a cycle) and Sunbelt typically keeps it around for 7 years, getting more than 50% of original cost ("OEC" or original equipment cost) in rental revenue per year. After 7 years, equipment is disposed of at 40 cents on the dollar. Non-resi construction end markets are less than half of the business, and the rest is industrial, MRO and more. Renting equipment lets you get the exact right piece of equipment for a job. As an example, you used to find backhoes on jobsites much more, because a backhoe is the swiss army knife of earthmoving. That user might now prefer to rent either an excavator or a bucket loader, each of which peform half the function of the backhoe but in a more efficient manner. Rental also conserves capital, reduces the need for equipment yards/storage, solves logistics/ eliminates the need for vehicles that can move equipment, and solves the difficulty of maintaining owned equipment. Secular Trends The secular tailwinds come from both increased rental penetration as well as market share gains by the largest players. The use of rented equipment accounts for about 55% of the equipment market today and I expect it to hit at least 65% over time. Penetration is up from the low 40% range pre-GFC and single-digits in the 1990s. The top two players URI and Sunbelt have 15% and 11% share, respectively, and players smaller than the top 100 have 44% of the market. The top 10 players have grown market share from 20% in 2010 to about 45% today. The largest rental company businesses have improved over time. Scale gives purchasing economies with OEM suppliers, efficiencies in logistics and maintenance, and higher equipment utilization. URI and Sunbelt purchase equipment 15-20% cheaper than mom & pop operators. Moving heavy equipment to and from job sites requires a large fleet of dedicated vehicles. Equipment maintenance benefits from having expertise by equipment type, mechanic sharing and better utilization of parts and spares. In a typical branch, 6 out of 20 total employees might be mechanics. Utilization is measured both by time/physical utilization, which is just the amount of time the equipment is on rent, or by dollar utilization, which is measured by the rental revenue divided by the cost of the equipment (basically, asset turns). Dollar utilization is perhaps the most important metric, because it combines the time on rent and the rental rate. Dollar utilization is higher at the scale players for a large variety of reasons. More locations give larger players density and a higher likelihood that a given piece of equipment is needed by someone in that geography. It also lowers transportation costs and time and most importantly allows locations to share equipment. A better repair function means machines are on rent for longer and means that there is more equipment available to rent. A wider variety of equipment on rent also leads to higher rates. Sunbelt frequently mentions that they are not the lowest price, but they win business because of breadth, availability and service. The factors I’ve outlined above have led to stable dollar utilization, rising margins and thus rising returns on capital over time: Specialty rental equipment has become a larger part of Sunbelt’s mix over time. Specialty is a catch-all for equipment that can have more of a service component or more of a temporary, emergency, or one-off use case. When looking at historical results, note that specialty carries lower physical utilization but higher margins. Specialty equipment also depreciates more slowly and is generally less cyclical than general tool (i.e. non-specialty). Cyclical Factors Equipment rental is a cyclical business. Sunbelt will tell you that because equipment rental is now an essential part of customer’s businesses, rather than used as a top-up, future cycles will be more muted than the past. I mostly believe this for a few reasons. First, the large players are larger and more sophisticated. CEO Brendan Horgan likes to say that in the GFC they almost blindly lowered prices by 20% across the board without any pricing tools or great reason to do so. Second, the top 10 players are less leveraged. In the GFC, you not only had more leveraged companies, but some companies actually had covenants tied to...