McGrath RentCorp Posts Solid Growth Amid Headwinds

By Markets Fool.com

Image source:McGrath RentCorp.

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Despite some mixed results, McGrath RentCorp (NASDAQ: MGRC) continued to post improvement on the top and bottom lines in the second quarter. Demand for modular buildings has led to solid growth and will keep the business steady as the year goes on. Here are the highlights from the quarter thatinvestors should know.

McGrath RentCorp results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Total revenue

$103.1 million

$96.0 million

7.3%

Net income

$9.1 million

$8.5 million

6.9%

Earnings per share

$0.38

$0.32

18.8%

Data source: McGrath RentCorp earnings release.

What happened with McGrath RentCorp this quarter?

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The broad trends for McGrath RentCorp are similar to what investors have seen for the last few quarters. Demand for modular buildings is up, but weak demand in the communications market has resulted in weakness in electronics, and, of course, low oil prices have hit the tanks business. Here's a look at a few key metrics:

  • Mobile modular revenue rose 14% year over year, to $31.6 million, and operating income jumped 57%, to $8.3 million. This is the 13th consecutive quarter of revenue growth. Utilization also rose, from 74.4% to 75.8%, which helps drive operating income higher.
  • Rentals of communications testing equipment continue to be weak, with TRS-RenTelco revenue declining 7%, to $20.3 million. Earnings before interest and tax (EBIT) increased slightly to $6 million. The company is starting to sell underutilized equipment to lower costs, keeping the bottom line in the electronics business intact.
  • Adler Tank Rentals, which has struggled amid the decline in oil prices, saw revenue decline 16%, to $14.8 million, in the quarter. Utilization fell from to 49.4% from 60.6% a year ago, and EBIT fell 41%, to $2.2 million. Management doesn't expect to see an increase in demand for tanks in the near future, so investors shouldn't expect this segment to contribute much to the bottom line.
  • Debt decreased by $2.7 million in the quarter, to $363.1 million.
  • The dividend rate increased 2%, to $0.255 per share quarterly.

What management had to say

Weakness in oil and natural gas drilling has, not surprisingly, been a big drag on results. In fact, it has overshadowed solid growth in the mobile modular business for the past year, a trend management doesn't expect to stop in the next few quarters.

For the full year, management would be happy with operating profit, adjusted EBITDA, and EPS remaining flat with the prior year. And without a sharp rise in oil and natural gas prices, that's about all that should be expected.

Looking forward

Until energy markets recover, or communications companies start investing in next-generation technology, we'll likely see weakness in both markets. But that's unlikely to happen in 2016, and could be a drag on 2017 as well.

The mobile modular business will continue to carry the load, and, as it is McGrath RentCorp's biggest business, it's good for investors to see growth there. A 3.2% dividend yield is a solid payout to fall back on as well.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends McGrath RentCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.