McGrath RentCorp's Growth Continues Despite Market Challenges

By Markets Fool.com

McGrath RentCorp is benefiting from more schools and businesses renting buildings today. Image source: Getty Images.

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Struggling oil and gas companies and a lack of investment in new communications infrastructure continues to be a drain on McGrath RentCorp's (NASDAQ: MGRC) business. But the company has invested in building out a network of modular buildings that aren't as susceptible to the same business phases as other parts of its business. And that's great for investors because it's this mobile modular segment that's driving results so far in 2016.

McGrath RentCorp results: The raw numbers

Metric

Q3 2016

Q3 2015

Growth (YOY)

Sales

$122.0 million

$113.0 million

7.9%

Net income

$12.9 million

$13.6 million

(5.5%)

Adjusted EPS

$0.54

$0.54

flat

Data source: McGrath RentCorp Q3 2016 earnings report. YOY = year over year.

What happened with McGrath RentCorp this quarter?

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The results above show the wide view of the company's results. But when you dig deeper, it's a tale of three businesses performing very differently.

  • Mobile modular segment rental revenue was up 10% to $33.2 million, continuing a strong trend for the business. As a whole, the mobile modular business saw income from operations increase 4% to $12.7 million in the quarter. Income results would have been even better if it weren't for a 30% jump in direct costs to $9.7 million.
  • Rental revenue from TRS-RenTelco fell 10% to $20.4 million because of a highly competitive environment in communications test equipment. Not only was utilization low, at 61.2%, but rental prices fell in the quarter. As a result, income from operations was down 10% to $6.4 million.
  • The Adler Tank Rental business struggled as oil and gas demand continued to be weak. Rental revenue fell 19% to $14.2 million and utilization dropped to 49.4%. That led to a 48% decline in income from operations to $2.7 million.

What management had to say

The mobile modular business continues to hold up the rest of the business, which has been the case for well over a year now. And Adler Tanks isn't in a position to recover unless oil and gas prices rise, which may not happen anytime soon.

The good news is that the mobile modular segment is the largest in McGrath RentCorp's business, so it can overcome weakness in communications and energy. And that's what management is banking on given the long-term industry trends. Still, guidance is for income from operations and earnings per share to be "comparable to, or slightly below" the same period a year ago.

Looking forward

Investors should expect more of the same for the foreseeable future as low energy prices and a lack of communications investment hurts results. It will be important to watch margins in the mobile modular segment because direct costs rose 30% this quarter, compared to a 10% rise in rental revenue, and that's a big reason net income dropped. If costs can be controlled, the growth in mobile modular could still leave McGrath RentCorp with top- and bottom-line growth overall, despite some weak spots in operations.

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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.